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PE finds plenty of risks but also attractive opportunities in Southeast Asia

PE finds plenty of risks but also attractive opportunities in Southeast Asia Anthony Harrington

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Despite looking intensely vulnerable to both economic, political and natural disasters, Southeast Asia is exhibiting the kind of dynamic growth that private equity investors have always associated with above average returns. A recent report from the Boston Consulting Group (BCG), Private Equity in Southeast Asia: increasing success, rising competition, reviewed recent dealmaking activity in the area and looked at what is driving transactions in one of the world's most dynamic and fast-growing regions.

BCG points out that, over the last 10 years, the region has become "a dealmaking hotspot", and has attracted the attention of leading US and European private equity houses in the process. The Association of Southeast Asian Nations (ASEAN) consists of ten countries; the original founders back in August 1967 were Indonesia, Malaysia, the Philippines, Singapore and Thailand. They were subsequently joined by Brunei, Burma, Cambodia, Laos and Vietnam. As a trade zone, the area boasts a population of some 600 million, or 8.8% of the world's population, and has a combined nominal GDP of more than $US3.3 trillion, with GDP growth in excess of 8%.

On the downside, investors do have plenty to worry about - most notably the region's vulnerability to natural disasters such as Typhoon Haiyan, which devastated parts of the Philippines on 8 November 2013, allied to strong political volatility emphasized by Thailand's riots in 2010 and the November 2013 rioting that sent the country's prime minister, Yingluck Shinawatra, fleeing to a secret location. But the upside, in terms of corporate out-performance, is proving strong enough to put ASEAN squarely in the sights of a number of leading PE houses. According to BCG, ASEAN is already the third-largest emerging market bloc behind China and India, and is easily outperforming both Brazil and Russia. The current growth rate is expected to rise to 10.2% compounded through to 2016. Not surprisingly, this growth is being driven by the simultaneously encouraging economic liberalization across the region. Restrictions on foreign ownership are easing and Malaysia in particular has made efforts to encourage the formation of a local PE sector. Economic integration among the 10 member countries is rising and ASEAN is targeting 2015 as the point at which it wants to establish a common single market across the region, freeing up labor flows and reducing tariffs.

There are still plenty of barriers to be overcome if this is to become a reality, but even talk about a single market is enough to fuel cross-country competition on a number of fronts, BCG says. It notes that:

"Some of the bigger local players, such as AirAsia, Maybank and CIMB are establishing footholds in multiple countries in the region."

Not surprisingly, considering the level of growth, the region's middle class is expanding fast. Some 102 million households in the region are expected to achieve an annual income of more than USD3,000 by 2015 (27 million today). This, BCG points out, will create and is creating investment opportunities in a range of industries, including retail, consumer products, health care, education, transport and telecoms. Another key point made by BCG concerns the relative status of China and ASEAN in terms of competitive pressure:
"Because there is, in general, less competition within many sectors of the Southeast Asian economy than within China and India, profit margins are correspondingly higher. As a result, despite Southeast Asia's smaller market size, profit pools are frequently as large as those in China and India - if not larger."

It will be interesting to see how much of a dampener the devastation in the Philippines and the latest spate of rioting in Thailand put on PE ambitions in the area. As BCG notes, earnings multiples have risen to the point where "the corridor for success is narrower than in the past", and real returns from deals now increasingly depend on skillful execution of the post-deal implementation strategy.

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Further reading on Asia

Tags: ASEAN , Asian middle classes , BCG , Boston Consulting Group , Brunei , Burma , Cambodia , Indonesia , Laos , Malaysia , natural disasters , PE , Philippines , political unrest , private equity , Singapore , single market , Thailand , Typhoon Haiyan , Vietnam
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