Decrease font Decrease font
Decrease font Decrease font
Enlarge font Enlarge font
Enlarge font Enlarge font

By Gustavo Eiben '04
Head of North America Investor Relations, Aureos Capital


Southeast Asia: Maximizing Returns through Global Partnerships


What makes Southeast Asia an attractive region for PE investing?

With 587 million inhabitants, South-East Asia is a populous region of Asia. The area generated an estimated GDP of US$1.5 trillion in 2009 and an average GDP per capita of US$2,577, which compares favorably to other Asian countries. The region is definitely going through a period of change, with internal consumption of goods and services growing fast. The region has also been favored by the emergence of the Chinese and Indian economies, which have served to stimulate increasing intra-Asian trade.

There are some particular key trends that make this region an attractive market for PE investing:

Diversified region with young, rapidly growing population fueling domestic consumption; young growing population with high savings rates, rising levels of prosperity, education focused and skilled workforce.

Region long established commitment to market-based economies; the region adopted the path towards market-based economies in the 1960s with Central Banks becoming increasingly independent (in contrast with the economies of China and India).

Beneficial impact of the Asian financial crisis (1997); the region has exhibited steady economic growth since the crisis mainly supported by the stabilization of public finances, gradual withdrawal of the state from key sectors of the economy, improvements in corporate governance and recognition of the importance of small to mid-market companies.

Positives effects of globalization; lessons learned from the Asian crisis have also helped the economies of the region to benefit from the forces of globalization: diversification of new trade relationships especially with China and India, shift toward more value added manufacturing and economic diversification with new sectors arising such as electronics, component manufacturing and assembly, IT, automobile industry and food processing.

Relative immunity to the recent financial crisis and economic downturn; the worldwide recession caused by the US sub-prime mortgage crisis generally did not affect the strength and health of the region’s banking systems and the fundamentals of its companies. This resilience was mainly due to sustained and growing domestic consumption and to the fact that the region’s banks were not interested in sub-prime mortgages.
 
Strong growth outlook for the region; The region is expected to continue to be a dynamic and growing economy, based on steady growth in domestic consumer demand; its increasing intra-regional ASEAN trade and its growing contribution to overall global trade. Aggregate GDP growth in the region is expected to experience growth of 3.1% in 2010 and increase to 4.1% in 2011.


Small and mid-market opportunities:

In our opinion, the region has an abundance of private equity investment opportunities in the small and mid-market sectors that are not matched by the availability of suitable forms of financing/capitalization. The scale of the opportunity is large as in most economies. A large number of small and medium-size companies employ a majority of the population (contributing an estimated 50% of the regional GDP). However, in our opinion, to effectively take advantage of these opportunities, it is necessary for an investor to have the right team operating on the ground.

It is common to see investment opportunities in small and mid-market transactions arising from the following phenomenon:  

Growth opportunities occur when emphasizing companies reach a point where it is necessary for them to improve efficiencies and productivity, acquisitions opportunities and/or restructuring processes. Growth capital is essential for these companies to execute their expansion plans.

Increased demand for institutional support as family businesses recognize the benefit of institutional ownership in order to exploit the opportunities generated by economic growth.

Institutional ownership enables these companies to attract more professional managers to these businesses and to provide for the financial flexibility needed by family owned firms who wish to expand into new markets or geographic areas.

Limited competition as regional banks prefer asset based creditors, rather than cash flow based lending and are unwilling to provide cash flow financing. In addition, larger private equity investors tend to focus on higher value transactions and remain reluctant to establish local infrastructure, which are critical to the success of investing in the region.

Attractive Valuations as small and mid-market companies usually present lower entry multiples. Valuations in general have also declined from market highs of 2007 while companies’ growth earnings have picked up in 2009/2010. Even with the global economic slowdown, many Asian companies have maintained strong balance sheets and steady earnings growth during this period.

Which sectors (trends) to look for?

Although we prefer to take a diversified sector approach, which allows flexibility to adapt to a fast changing investment environment, there are some trends that should help identifying attractive and high growth sectors. These sectors are usually well positioned to withstand volatile economic conditions, particularly those that have the potential to become country and/or regional market leaders and to grow within three to five years to a size that would be of interest to strategic investors, larger private equity groups or, in some cases, enable them to list on stock exchanges.
 
Here are some of the regional trends we have identified:

Consumption – Trend: Large and young population with growing purchasing power and propensity to spend. Consumers largely debt free and savings rich. Sectors of interest: Retail,
Consumer Goods, Healthcare and Education

Manufacturing – Trend: Re-focusing on Asian markets for long term growth (away from a reliance on Europe and North America for final demand). Can no longer focus on cost alone; value add, productivity, disintermediation. Sectors of interest: Value Added Manufacturing, Automotive and Outsourced Manufacturing

Services – Trend: Manufacturing and industry driving recent growth, however, services currently growing at a faster pace increasing their share of GDP. Urbanization, deregulation and outsourcing. Sectors of interest: Logistics & Transportation, Telecommunication, Media & Technology and Business Services & Outsourcing

Governments spending – Trend: Large spending programs announced as part of government stimulus packages after the global crisis. Majority of focus is on infrastructure, which is likely to continue as governments invest to improve competitiveness. Sectors of interest: Infrastructure, Construction Materials and Rural Services

Summary

At Aureos, we like the idea of the ASEAN region progressing towards a unified market, still with a diversified country base with stable operating environments, robust financial institutions and long established market-based economies. In our view, the region presents strong domestic consumer growth patterns driven by an expanding population. This situation provides attractive opportunities for private equity capital, mainly in the form of growth capital and buyout transactions. There is certainly an abundant deal flow in the small-mid market segment driven by the increasing demand for outside institutional capital and attractive valuations…. We certainly look forward to continuing to invest in the region.

About Aureos Capital

Aureos is a global private equity fund manager with an 18-year history of investing in emerging markets. The group currently covers investments in over 50 emerging market countries, with more than 90 investment professionals across 29 offices worldwide. Within emerging markets, Aureos invests through different funds in Asia, Latin America and Africa.
 
Aureos raised its first dedicated fund in 2004 focusing on investment opportunities in Thailand, the Philippines, Indonesia, Malaysia and Vietnam; we are currently adding Cambodia and Laos for our next one, which we plan to raise in 2010/2011. Through our predecessor firm (CDC), we have been investing in the region since the 1990’s.

About the Author

Gustavo Eiben

GUSTAVO EIBEN '04
Head of North America Investor Relations, Aueros Capital 

Mr. Eiben is the head of North America investor relations of Aureos Capital. Aureos is a global emerging market private equity manager focused on small to mid-market transactions across Africa, Asia and Latin America.

As head of North America IR, Mr. Eiben is responsible for establishing and maintaining relationships with existing and potential investors, and for developing new business and products that fit Aureos’ overall global strategy.

Prior to Aureos Capital, Mr. Eiben was a member of the Alternative Investments Group at J.P. Morgan Private Bank raising and investing capital in third-party private equity funds. Prior to that, he was the head of fundraising and business development at Schroeder Ventures US and before that, a member of the UBS Private Equity Funds Group; the placement arm of the bank. Mr. Eiben started his career in the Mergers and Acquisitions group at PricewaterhouseCoopers in Buenos Aires, Argentina.

Mr. Eiben received his MBA degree from Thunderbird, the Global School of Management and his BA degree from Universidad Nacional de Cordoba, Argentina.