Southeast Asia: A story develops

Global firms are moving in, regional firms are investing, and valuations may go higher.

As Southeast Asia came into sharper focus in 2012, the overall theme was promise amid rising valuations. 

Along those lines, Malaysia had a story to tell. Its stock exchange closed at record highs and recorded $5.28 billion after hosting the some of the largest IPOs globally. Felda Global Ventures, a Malaysian palm oil company, raised $3.28 billion in a June debut. A month later, Abraaj Capital exited Malaysian hospital chain IHH Healthcare in an RM 6 billion (€1.6 billion; $2 billion) IPO.

The hot stock market has created a pretty good valuation gap between public and private markets, according to sources.

Big ticket IPOs in home markets tend to send a message to entrepreneurs that their company is worth more than it was before. The perceived worth of companies a step or two away from public listings will likely be the first to rise as “they will find that their valuations will be based on prospective valuations in the future”, Deepak Natarajan, a director at Intel Capital said.

In Southeast Asia as a whole, Navis Capital Partners, which intends to open offices in Indonesia and Vietnam in 2013, has been active. On the exit side, the firm divested its 70 percent stake in Dunkin Donuts and Au Bon Pain for $45 million, reaping a 2.5x return on its original investment, according to the firm. Then in July, Navis exited Indonesia-based Efficient English Services, reporting a 10x return.

Indonesia continues to be the regional star, with roughly $3 billion raised for investment in the country. An ongoing concern is that too much capital is in search of too few deals. 

Nicholas Bloy, Navis’ co-founder, believes $3 billion is small compared to the investment requirements of the whole economy. “It’s just grown from a very small base so it seems quite large. The economy can absorb it over the next few years.”

But global firms are also moving in. In October, Kohlberg Kravis Roberts established a Singapore office. KKR will need to invest the $6 billion Asia-focused fund it reportedly closed in December and Southeast Asia will likely be a key deal destination.

TPG Capital, currently raising a $4 billion pan-Asian fund, will likely seek to invest in Indonesia through its partnership with local firm Northstar Pacific Capital and The Carlyle Group in October made its first Southeast Asia deal, putting $100 million into Indonesian telecom tower operator Solusi Tunas Pratama, according to media reports. 

Large global firms bidding on assets will drive valuations higher. Valuations in Indonesia are already high, by some estimates 30 percent above historical averages and over two times that of China. 

Bloy attributes this to “relatively easy credit and liquid public markets setting expectations”, adding that “private equity has to fight to get in.”

The region’s promising markets are not only complicated by high expectations. In Indonesia, investments require local connections and rapport with the wealthy families who dominate the economy. 

As well, Vietnam’s 88 million population and plans to speed up privatisation holds deal potential. But the poor economy and levels of corruption have kept it largely on hold. “It is surprising when one visits Vietnam to hear foreign managers and investors casually talk about the necessity of paying bribes,” Jason Wright, associate managing director at Kroll in Singapore. 

Both markets underscore the difficulties in a region that the global firms, as comparative newcomers, will face in 2013.