As Southeast Asia gains prominence in the global private equity landscape, the region’s mid-market segment, especially, shows bright prospects, according to seasoned investors.
“In Southeast Asia, we are beginning to see a lot of positive trends. The demographic dividend is taking shape. You have seen a lot of the young population entering the workforce, and that is growing, and we are also seeing a lot of shifts in consumerism. So that is also, again, beneficial for private equity owners,” said Tower Capital Asia founder and CEO Danny Koh.
Koh was speaking at a panel discussion titled ‘Will SE Asia predominantly be a mid-market PE play?‘ on the first day of the Asia PE-VC Summit 2024 on Sept. 17.
“For [the growth of] frontier markets in Asia, the need to have a fully developed PE market is critical,” said Joshua Morris, Founding Partner & CEO of Emerging Markets Investment Advisers, during the session.
Luyi Zheng of ShawKwei & Partners and Colin Dunne, Partner at Navis Capital Partners, also joined the discussion.
The panelists highlighted frontier ASEAN’s underdeveloped private capital ecosystems, with limited institutional early-stage capital and private debt providers. They emphasised the importance of building out the ecosystem and participating in mandates to drive growth and development in frontier markets.
By adopting strategic investment frameworks, focusing on sustainable growth, and de-risking investments, private equity firms can capitalise on the vibrant opportunities Southeast Asia offers. As the region continues to evolve, both established and emerging markets within Southeast Asia present a fertile ground for innovative and impactful private equity investments.
Economic diversity
Southeast Asia’s rising importance in the global private equity market is driven by its resilient economies, diverse investment opportunities, and strategic adaptability.
With a vibrant $4-trillion economy with 700 million people, Southeast Asia is receiving more attention than ever given that it hosts some of the fastest-growing individual markets in the world.
One critical aspect that situates Southeast Asia as a significant PE destination is its diverse economic landscape. Countries range from wealthy economies like Singapore with a per capita GDP of about $80,000 to developing markets such as Vietnam and the Philippines, offering a rich variety of investment opportunities.
Koh highlighted the demographic dividends and evolving consumer behaviour as critical drivers. “The growing middle class is driving spending on education, healthcare, and consumer goods,” he noted.
Geopolitical dynamics are also playing a significant role. Dunne underscored Southeast Asia’s geopolitical stability akin to Switzerland in APAC. “The region has strong relations with neighbouring countries and benefits from collective bargaining through ASEAN, making it a stable and attractive investment destination,” he said.
However, Morris indicated that frontier markets can get impacted due to geopolitical shifts as they’re so reliant upon, in many cases, foreign direct investment for growth, government-to-government links, and in many cases, this largesse from either regional governments or from civil society that’s operating out of those markets.
“Frontier markets can be significantly hit by the geopolitical crisis,” Morris observed.
Value creation strategies
To stand out in the mid-market segment, Luyi Zheng of ShawKwei & Partners emphasized the importance of specialisation for creating value. “A GP needs to either specialise in specific sectors or markets. This specialisation not only enhances deal sourcing but also adds significant value through deep industry expertise,” she stated. ShawKwei & Partners, for example, focuses on industrial B2B sectors like precision engineering and healthcare supply chains.
For Tower Capital Asia, Koh said “our playbook is differentiated by focusing on trend-based investments rather than sector-specific ones. We seek deals with strong brand equity and heritage stories, coupled with top global talent to execute transformational growth.”
Balancing cost efficiency with growth investments is crucial for enhancing portfolio companies’ value. Zheng shared insights on strategic investment decisions: “We often invest in state-of-the-art facilities and upgrade equipment, which not only creates a one-stop solution for customers, increasing revenue but also optimizes production, reducing costs.”
Elaborating on a growth buyout strategy, Dunne added “We invest in SMEs that excel in specific domains but require support in channel expansions, product development, and operational improvements. By focusing on revenue growth and margins rather than cost-cutting, we build assets that attract global strategics.”
Exit opportunities
Successful exits remain a focal point for private equity managers. Koh illustrated that Tower Capital Asia’s exit strategy is dependent on the transformation of portfolio companies. “By professionalising and transitioning from family ownership to professional management and broadening the product range, we increase the attractiveness of our companies to strategic investors,” he noted.
In frontier markets, Morris highlighted unique exit pathways, including strategic acquisitions and management buyouts. “Strategic regional integration and roll-up strategies are making these markets more attractive for later-stage buyout firms, presenting growth investors with robust exit opportunities.”
He also spoke about the need for thorough market readiness: “In frontier markets, it’s crucial to de-risk companies. Establishing strong governance, financial controls, and ESG commitments are key to making investments appealing to potential buyers.”
Geopolitical risks
Geopolitical shifts can significantly impact investment decisions and pose an array of challenges to the investment climate. Zheng acknowledged that while supply chain diversification has been discussed for years, tangible actions are now evident. “Customers are making long-term commitments to diversify their supply chains. Southeast Asia manufacturers prepared to capitalize on these opportunities by proactively managing their facilities can gain a larger market share.”
Koh pointed out the internal dynamics within Southeast Asia. “Besides external geopolitical benefits, internal trends like demographic growth and consumerism shifts are creating a favorable environment for investments.”
Morris addressed political risk concerns in frontier ASEAN markets. “It’s essential to evaluate each country and sector individually. Political risk is often perceived as higher due to a lack of understanding. However, many frontier markets have stable political environments,” he explained. “De-risking investments by focusing on strong governance and compliance is crucial for attracting strategic buyers.”
