Vietnamese workers walk past the stock exchange building in Ho Chi Minh City
Southeast Asia's private-equity investments will pick up as early as next year, reversing a half-decade slump as the region's improving economic outlook attracts funds, said Sebastien Lamy, a partner at Bain & Co.
Private-equity deals in the region this year are expected to match 2011's US$5.3 billion or post a decline, before staging a rebound over the next two years, Lamy said, citing Bain research. The investments dropped from a peak of US$12.3 billion in 2007, according to data from the corporate consulting firm.
Private-equity deals are set to grow in a region with a combined population of about 600 million people, as its biggest developing economies are accelerating even as the expansion in China and India slows. Investors almost doubled funds allocated to the two nations in the three years through 2011, while funds spent in Southeast Asia stagnated, according to a May report by McKinsey & Co.
"The overall economic outlook for Southeast Asia remains solid and we are seeing strong interest by investors," Lamy, a partner at Bain in Singapore, said in an interview Monday. "Deal-making in the region will pick up in 2013 or 2014."
Private-equity investors are set to increase bets in Southeast Asia as the allure of India and China fades, said Navis Capital Partners Ltd., which manages $3 billion of private and public equities.
"There is a question mark about prospective returns, given the slowdown in the Chinese economy," Navis Managing Partner Nicholas Bloy said in an interview on October 24. A slowdown of private-equity investments in Southeast Asia "will reverse itself very powerfully in the next two or three years."
The region is drawing more global players. KKR & Co., the private equity firm run by Henry Kravis and George Roberts, said October 25 it opened an office in Singapore and plans to expand its business lending to Asian companies amid a shortage of funding in the region. The New York-based company is seeking to make more loans including mezzanine financing and investments in high-yield bonds over the next five years, said Joseph Bae, managing partner of KKR Asia Ltd.
Deals in the region may be hurt by the European debt crisis and slowing growth in Asia's biggest economies, said Larry Oberfeld, a London-based senior analyst at private-equity research firm PE Asia.
"There are some uncertainties," he said by telephone. "Growth in China is slower than expected, which hampers deal-making in Southeast Asia. And the concerns surrounding the European fiscal crisis are also having an impact."
The rebound in Southeast Asia investments was also delayed as some deals in Vietnam and Indonesia were held back, said Lamy from Bain, the Boston-based consulting company that created private-equity firm Bain Capital LLC, which was co-founded by US presidential candidate Mitt Romney.
In Indonesia, investors are having difficulties finding companies of the right size, and price expectations between buyers and sellers are still too wide, he said. Investors in Vietnam are taking a wait-and-see approach because of the economic outlook, he said. Vietnam faces a high risk of faster inflation, Do Thi Nhung, deputy head of the State Bank of Vietnam's monetary-policy department, said November 5.
"You have had continued fears around inflation and pressures on the dong," Lamy said. "Indonesia and Vietnam are still seen as the most attractive destinations in the region. However, the wave of deals expected by many for this year will come later."
The improving outlook of private-equity investments has led to home-grown firms. Axiom Asia Private Capital, run by former managers of Government of Singapore Investment Corp., said private-equity investments in Southeast Asia are among those that could deliver better-than-expected returns.
These markets could offer "some contrarian surprises," Chihtsung Lam, managing partner at Axiom Asia, said in an interview on October 8. Axiom was founded in April 2006 by Lam and two colleagues from GIC Special Investments, the private-equity arm of Singapore's sovereign wealth fund.
The government fund, which manages more than $100 billion of the city's reserves, said in July its holdings in so-called alternative assets increased to 27 percent from 26 percent in the year ended March, as private equity and infrastructure investments rose. GIC also boosted its cash to levels exceeding the 2008 financial crisis as it pared stocks and bonds.
GIC and the region's sovereign wealth funds, including Malaysia's Khazanah Nasional Bhd., "are primed to play significant roles" as private-equity investors, Lamy said.
Singapore and Malaysia were "historical sources" for deals in Southeast Asia and they "will continue to offer a significant deal flow of private-equity investors," he said.
Funds may eventually turn to smaller markets. Silk Road Management, an investor in frontier markets, said last week it will take stakes in three Myanmar projects by year-end, the first private-equity deals in the region's poorest nation as it emerges from five decades of isolation.
"Southeast Asia is a promising region with very strong fundamentals," Lamy said. "People are going to have a foothold beyond 2014 in countries like Vietnam, the Philippines and Myanmar."
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