Trends in Deal Sourcing in Southeast Asia

Roundtable

Trends in Deal Sourcing in Southeast Asia

Panellists

Sanjay Gujral
Regional Managing Director, L Capital Asia (LVMH)

Nainesh Jaisingh
Managing Director & Global Co-Head, Standard Chartered Private Equity

Eugene Lai
Co-Managing Partner, Southern Capital Group

Devin Wirawan
Principal, Saratoga Capital

Kyle Shaw
Managing Director, Shaw Kwei & Partners

Moderator
Nancy Yu
Regional Managing Director, Asia, Merrill Corporation

All information and opinions are accurate to 9 October, 2015.

Trends in Deal Sourcing in Southeast Asia

Introduction:
Merrill Corporation recently hosted a panel discussion at
a Private Equity conference in Singapore. Through our
Regional Managing Director for Asia Nancy Yu we asked
a distinguished panel of private equity professionals
operating in the Southeast Asia market about the nature
of deals, sourcing new opportunities in the region, what
makes the environment unique and whats driving trends.
The panellists expert comments, reflected in this report,
describe important factors impacting deal sourcing, from
growing competition and the need to become specialist
rather than generalist investors, to the challenge of building
trust with founders and entrepreneurs in the region. These
factors provide an interesting insight into the evolving
nature of private equity investment in Southeast Asia.
Merrill Corporation would like to thank the panel for their
valuable time and input into the creation of this report.

members have seen four or five cycles. But, we still have to

do the work every PE firm has to do focus on certain
entrepreneurs and industries and get to know them better.
Kyle Shaw:
Shaw Kwei & Partners strategy is focussed on precision
parts manufacturing; ship services, offshore oil and gas
services; and German, Northern Italian, Austrian and Swiss
manufacturing champions that have a presence in Asia.
We prefer controlled deals, but we also have invested in
deals where were a significant minority.
We look for deals where we can add value. We want to be
involved in the strategy, financial planning, management
succession issues, and anything to do with an IPO or
M&A, but generally at the board level. We get heavily
involved in the accounting and financial control of these
companies everything from bringing in ERP to
managing audits, to actually hiring and placing staff.

Panel Discussion:
Nancy Yu:
Can you describe your firms deal sourcing style? Do you
have any special considerations related to sourcing in SEA?

We believe if we participate in
things that are complicated, we
will have a competitive edge
vis--vis other sources of capital.

Eugene Lai:
Southern Capital is strictly a control investor. Weve
acquired 51% or more of the equity in every investment
weve ever made. We build a competitive advantage by
developing deep and extensive relationships and
expertise in certain sectors and countries. Very often,
when we approach the owner of a company, there is no
transaction, but we dont give up and continue to build
the relationship. Then if the owner changes his mind, he
may only speak to us and give us the opportunity to
structure something on a proprietary basis. Even if he
decides to speak to a few potential buyers, hopefully we
will have an advantage as we would know him and his
business much better and can move quickly.

We prefer more complicated deals because its a less

competitive space. Complicated deals, such as investing
in a German company, require a significant learning curve
and experience that we already have. Similarly, there is a
learning curve when delisting companies in Singapore.
We believe if we participate in things that are
complicated, we will have a competitive edge vis--vis
other sources of capital.

Nainesh Jaisingh:
Standard Chartered Private Equity is an institution-backed
private equity house. One obvious advantage we have is
our access to the banks large franchise across Asia,
Africa and the Middle East, so we benefit from that
large pipeline of deal flow and opportunities. What
differentiates us as an institution is our knowledge of the
operating environment, and then as individuals, our team

Devin Wirawan:
Saratoga Capital was started by two Indonesians, one of
whom is Edwin Soeryadjaya, the founding family of Astra.
So when we first started Saratoga ten years ago, we were
able to leverage our founding familys relationship network.
Back then there were only a handful of private equity funds,
but now we see more regional private equity funds and a
lot of Indonesian-focussed funds entering the market.

Kyle Shaw

Trends in Deal Sourcing in Southeast Asia

Also, many business owners are more sophisticated now,
so its not enough just to offer them money and some
generic formula. We have to be more creative. Trust in the
Indonesian and Southeast Asian market is also a very
important factor. As much as owners want to sell to the
highest bidder, they also have to believe they can work
well with the private equity fund. So, in consideration of all
these factors, what we have to do now is build and
cultivate business relationships for the long-term.
Sanjay Gulral:
L Capital Asia is a pan-Asian franchise sponsored by LVMH
[Louis Vuitton Mot Hennessy], the worlds leading luxury
goods company. LVMH has invested third-party capital in
private equity funds since the early 2000s, first in Europe,
and since 2009, in Asia. We leverage off what LVMH does,
but LVMH plays in luxury goods and we focus in the
affordable product segments and the mid-market. We are
also very picky. We focus on fashion consumer products,
and maybe home improvement, beauty and wellness, food
and lifestyle, food and beverage products and services,
and selective retail and distribution. Opportunistically, we
look at media and entertainment, and travel and hospitality.
We entered China and India in 2009 and have since
expanded geographically to Australia, Korea, Taiwan,
Singapore, Dubai and Europe. We have regional teams
looking at these six industry sub-segments, trends and
dynamics within each of the geographies.
Nancy Yu:
What are some of the key opportunities for value creation
that are unique to SE Asia?
Nainesh Jaisingh:
What is unique about Southeast Asia, with so many
countries[in the region] its a series of shallow markets
other than Indonesia, which has heft. That presents
challenges in terms of resourcing, the need for a network in
each market, and in the ability of businesses to scale.
Consider the opportunity to take a Malaysian or Thai
business and make it pan-Southeast Asia. Thats a huge
opportunity for businesses that have the potential to go
regional. However, many mid-sized companies dont have
the organisational structure, quality of people and finance
guys on their team who can actually do this. We help these
companies get to a place where they can scale. The other
area where we add value is in exporting. We can help firms
by opening access to markets or by helping them make

acquisitions overseas to establish a beachhead, a brand

presence or a distribution network in target markets. These
areas have played out well for us, apart from being the
usual providers of capital and financial support.

What is unique about Southeast Asia,

with so many countries[in the region]
its a series of shallow markets other
than Indonesia, which has heft. That
presents challenges in terms of
resourcing, the need for a network in
each market.
Nainesh Jaisingh

Nancy Yu:
Can you talk about management talent as a lever for
value creation?
Kyle Shaw:
Ten to 15 years ago, most of the focus in Asian private
equity was on growth capital, taking minority positions,
investing with the management team in place to someday
replace the owner-manager, and helping them grow the
business. The idea of actually running the company was
daunting because these companies had strong
management teams in place and the talent pool to
replace those people was very shallow.
Today the talent pool is quite deep and impressive. There
are many people from China, Taiwan and Southeast Asia
who have worked overseas or with multinationals in Asia,
who are in their 40s and 50s, and have really rich and
deep experience. If you take over a company today, there
is a deep pool of people you can attract. For example,
Malaysian Chinese have been very well trained in
engineering; they work all around the region and theyre
conversant in Mandarin and English. You can pretty much
plug them in anywhere, and they know what to do and
how to do it. This extends to China as well. Today, the 50
year old person you hire in China is quite different than 20
years ago. Im very impressed with the talent pool.
However, in terms of deal sourcing today, if a company
doesnt want to change, theres really no reason to talk to
4

Trends in Deal Sourcing in Southeast Asia

our firm. Change can be in terms of the shareholders, the
balance sheet, the product mix or the marketing of the
business. We come in with a very strong mentality about
change, which often has to be fundamentally driven by
new people coming in. You have to understand where the
company is, visualise where it should be going, and
identify the changes youre going to have to make. The
quicker you make them the quicker you can get onto the
value creation curve, which is what we all want.
Eugene Lai:
I have to thank Kyle for his favorable comments Im
Malaysian Chinese and also in my 50s! In every investment,
we have a tailored value add plan, and the important part of
that plan is to get the management team right because they
run the company. Were not a distressed investor, so when
we invest, we typically like the management team and the
CEO. But in the mid-market space where companies are
smaller, there are always gaps to fill. Theres never enough
talent but its better today than it was ten years ago. Our job
is to find those people and incentivise them properly.
Also, we feel that you can add value more effectively if you
have control. Thats why we only make control investments.
The other reason for control is, of course, exit. As a control
investor, we can deliver 100% of the equity to a buyer. Our
exits are typically trade sales where we feel we can get the
highest price. We try to buy right, grow and improve the
quality of the business in our investment period and find the
right buyer to sell to. Hopefully, we benefit not only from
growth, but also from multiple expansion when we exit.
Nancy Yu:
Control is a calculation, but it can be an emotional concept
for some entrepreneurs or founders, how do you handle that
in deal sourcing? Are there tricks that you can share?
Eugene Lai:
I wish we had tricks, but we dont! The truth is there has to
be a situation that makes a deal possible. There are times
when we first approach a business owner, he tells us theres
no deal. But three years later, he changes his mind. Maybe
the owner feels his children are not right for or are not
interested in the business, or he just wants to cash out and
do something else after building his business over many
years, or its a sale of a non-core asset by a larger company,
or a take private transaction where a substantial shareholder
or management team sees value in taking the company
private and needs support. If youre in an immature market,

control may not be the right strategy because you wont

find enough high quality control opportunities. We find
opportunities in the more mature countries in Southeast
Asia - in Singapore, Malaysia and Indonesia.
Nainesh Jaisingh:
Over the last 15 years the number of control opportunities
has certainly increased, driven by both sides. I think the
next generation is looking to do other things; they dont
want to be in that particular business. One way to handle
that is to give everybody their cash after selling out the
business. Thats one strategy were seeing across emerging
markets in Southeast Asia.
The other is the alpha story, which is now becoming more
important than the beta story. From 2002 to 2007 in Asia,
we were making returns based on growing economies and
markets going up. That story is not as hot a performance
indicator anymore, so when you need to have alpha to
deliver value creation, control is obviously very good.

We find opportunities in the more

mature countries in Southeast Asia in Singapore, Malaysia and Indonesia.
Eugene Lai

Devin Wirawan:
There are fewer controlled deals in Indonesia than in more
developed Asian countries because many companies are
still owned by the founder, who is not comfortable handing
the business over to their son or to professionals either.
Business owners see us as vultures, here to make money and
exit in three to five years. [Whereas] they want to build a legacy.
Five years ago when we approached a company, the
owner would always ask how much were going to pay.
Now they ask, What else can you bring to the business?
We have to show them we have the pertinent industry
expertise and a realistic vision of the companys next five
years. Thats how we minimise the uncertainty of working
with professional private equity funds.
5

Trends in Deal Sourcing in Southeast Asia

Five years ago when we approached

a company, the owner would always
ask how much were going to pay.
Now they ask, What else can you
bring to the business?
Devin Wirawan
Sanjay Gulral:
I dont agree that you cant add value in minority situations.
When we invested in 2010 in Charles & Keith, a highly
successful Singaporean business, it did not need capital. The
company chose us for our value-added proposition to help
them improve quality and expand geographically, particularly
into China, so even as a minority, we were able to add that
value. Weve had similar experiences with Chinese companies
sitting on a few hundred million dollars of cash on their balance
sheets whove invited us in for certain value-added propositions.
Weve also had a situation where we had control but we had a
partner who didnt allow us to add the value we wanted. There
are no black and white answers. Its a moving situation.
Nancy Yu:
Are there key differences in the way you manage deal
sourcing for majority and minority stakes?
Sanjay Gulral:
No, but certain geographies tend to yield more control
versus minority opportunities. For us, Singapore and
Australia have more control situations, and India, China and
Indonesia have been classical minority closed investment
markets. There are, however, also situations where weve
ended up taking control. When we started talking to
Crystal Jade four years ago it was about a minority deal
and taking the company public, but we eventually
converted it into a control situation. Were on the verge of
signing another large deal in China that is a buyout for us,
but when we first started talking with the company in 2011,
it was for a minority position. So it varies deal by deal.
Nancy Yu:
Can you comment on the competitive landscape in terms
of alternate source of capital?
Nainesh Jaisingh:
Competition has increased dramatically. According to a
recent Bain report, in the last five years, average multiples

have increased from eight times to twelve and a half times

EBITDA, and the holding period has increased from three
and a half to almost five years. Were competing with a lot
of capital within our industry, which is raising the prices and
extending the holding periods to get your equity back.
Add to that interest rates which are at an all-time low. So a
number of M&A transactions or expansions that should
have been financed by equity are being funded by debt
because its cheap and service-ability looks okay at these
prices. These alternative sources of capital are slowly
hurting our ability to source opportunities, but its cyclical.

For us, Singapore and Australia have

more control situations, and India,
China and Indonesia have been
classical minority closed investment
markets.
Sanjay Gulral:

Eugene Lai:
The key is not so much whether there is competition, but
what you spend your time on to develop a competitive
advantage. All of our team members are native to Malaysia,
Singapore and Indonesia. We have deep and extensive
networks in these markets. We know what sectors and
kinds of businesses we like and we put in a lot of effort
researching these sectors and building long term
relationships in a focused way. There are only a few control
investors in Southeast Asia. Other firms may do similar
things but they may be pursuing a different strategy. That
doesnt mean there is no competition but we believe we
are differentiated, and when a control opportunity
becomes available in the markets and sectors we know
well, hopefully we will have an advantage.
Maintaining discipline is key. We like stable, predictable
cash flow businesses. We believe its important to stick to
what we are good at and not stray. We dont typically
compete with the IPO market since we are control
investors, but we do compete with strategic buyers.
In addition to growing and improving the quality of our
portfolio companies, we also focus on how much debt we
6

Trends in Deal Sourcing in Southeast Asia

can take on in our portfolio companies and how to return
cash to LPs quickly. As a control investor, we are in a
position to make and implement these decisions.
Nancy Yu:
Are you facing a lot of competition from the big
conglomerates and corporates?
Devin Wirawan:
Yes, we see competition mainly from conglomerates who
have deep pocket, know the country well, and have a
strategic angle with potential synergies.
Nancy Yu:
Where are you looking in terms of deal sourcing in the
next 12 to 18 months?
Kyle Shaw:
Were looking for deals in the distressed space in ship
services and oil and gas, in precision manufacturing, where
European, American and Japanese companies want to buy
from suppliers in Southeast Asia and China but want to
move up the value chain for more quality and traceability
from their manufacturers, and in companies where theres a
generational change but the owner doesnt have a clear
succession plan and the company is not packaged well for
a multinational to buy.
There are some very attractive opportunities in Europe
where prices are relatively cheap on a global basis, in
German, Austrian, and Northern Italian companies that
have a strong franchise value in Asia. We can help them
expand their Asian business.
Failed IPOs are also an option. A lot of companies started
this year on an IPO track, but that window closed, so
theyre going to have to recalibrate and look towards
private equity. The good news is theyve made that
mental leap about wanting to bring in outside investors or
to go public, so theyre amenable to talking to us.

Executive Summary
Based on our panellists comments, the private equity
industry in Southeast Asia is encountering greater
competition from a steady infusion of private equity firms,
corporate conglomerates and strategic investors.
In addition, low interest rates have resulted in would-be
targets choosing inexpensive debt rather than private
equity capital to fund their goals. Company owners in the
middle market, where many private equity firms source
deals, have also become more sophisticated and now
expect more from their investors.
As a result, deal sourcing has become more competitive.
Sellers expect buyers to bring both financial support and
strategic value-added services to the table. Private equity
firms are focusing in specific industry sectors and
establishing long-term relationships with potential
targets. Panellists also noted the importance of seeking
controlled versus minority investments as the best
strategy to achieve their financial goals. These opportunities
tend to be more prevalent in mature markets such as
Singapore, Malaysia, Indonesia and Indonesia.
As much as competition over deals has increased, the
panellists were generally positive about the Southeast
Asia market. They believe they can differentiate
themselves by the value they add and in building
long-term relationships that get them into the deal early.

For more information about how Merrill Corporation

can support Private Equity transactions, please
contact us at info.asia@merrillcorp.com today.

Eugene Lai:
Weve made a lot of investments in healthcare, education,
value-added manufacturing, consumer and in certain
instances, infrastructure services, and we continue to focus
on these sectors. Weve also done a lot of upfront work
researching the oil and gas services industry, but havent
made an investment there yet.

Trends in Deal Sourcing in Southeast Asia

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