Nikkei Asian Review: PRIVATE EQUITY FLOODS INTO SOUTHEAST ASIA - 26

Nikkei Asian Review: PRIVATE EQUITY FLOODS INTO SOUTHEAST ASIA - 26

Cover Story

How private equity is shaking up Southeast Asia

Western funds rush in as market reforms and rapid growth open up new opportunities

BANGKOK -- Vietnam is still a communist country, but it is fast becoming one of the world's hottest markets for companies that are synonymous with aggressive capitalism: private equity firms.

The appeal for Western private equity firms -- known for their appetite for risk and debt-fueled buyouts -- is clear. Vietnam's economy is growing fast, its stock market has been performing well and the government has rolled out plans to privatize many state-owned enterprises. These are ideal conditions for private equity giants such as Warburg Pincus, KKR and TPG, which have been pumping money into Vietnam as opportunities shrink at home.

Warburg Pincus has led the pack, committing $1 billion to invest in Vietnamese companies. In March, the firm made Vietnam's largest-ever private equity investment by taking a $370 million stake in Technological and Commercial Joint Stock Bank (Techcombank) ahead of its listing on the stock exchange in Ho Chi Minh City in June.

Warburg's first Vietnamese investment was $200 million -- later raised to $300 million -- in Vincom Retail, a shopping mall owner now valued at around $3.5 billion.

KKR is also turning its attention to Vietnam. The leading U.S. private equity firm invested in Masan Group, a Vietnamese food and beverage company, last year. Ashish Shastry, head of KKR Southeast Asia, said, "Vietnam holds great opportunity with its growing economy and favorable demographic trends."

Vietnam's boom is part of a larger trend across Asia, where total private equity investment rose 38% to $158 billion in 2017 -- eclipsing Europe for the first time, according to research company Preqin. More money is coming. Carlyle Group has established its largest-ever Asia fund, at $6.65 billion, and Blackstone Group announced in mid-June that it has closed its first Asian-focused private equity fund, at around $2.3 billion. Together with commitments from its global buyout fund, Blackstone said it has a minimum of $3.8 billion to invest in Asia. Joe Baratta, Blackstone's global head of private equity, said, "The region continues to experience strong growth compared to other major markets, presenting compelling investment opportunities across sectors."

Growth has been particularly strong in Southeast Asia, where total private equity investment nearly tripled to $23.5 billion in 2017. Investors are betting on higher economic growth, rising investment in technology and growing middle classes across Southeast Asia.

The World Economic Outlook report by the International Monetary Fund forecasts stable growth for the five major ASEAN nations of Indonesia, Malaysia, the Philippines, Thailand and Vietnam, with growth of 5.3% in 2018 and 5.4% in 2019. 

While the projected growth rates for China and India are even higher, a Hong Kong-based investment fund specialist points out that with shares already trading at relatively high levels in those countries, big returns on investments are less likely.

In Southeast Asia, on the other hand, investors have more opportunities to invest in promising companies without breaking the bank. As a result, the specialist said, "high yields can be expected in three to five years." 

Another factor steering funds' attention toward Southeast Asia is widespread capital market reforms.

The 1997 currency crisis hit several ASEAN members hard, prompting them to introduce new regulations and other measures to prevent a recurrence. These included improving corporate governance practices to protect the interests of investors.

These reforms, which were largely modeled on those in the U.K. and the U.S., generally started around 2000 and have served as a catalyst for private equity funds to invest in the region.

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