Southeast Asia Sees Return of Private Equity –

HONG KONG – If you are among the many venture capitalist planning your first trip to China, you would be wise to make a side trip to Southeast Asia.

This year has marked a resurgence in the market after a financial collapse that stunted its growth for many years. There are positive signs everywhere. Moderate governments were elected this year in peaceful and fair elections in Indonesia, Malaysia and the Philippines. GDP growth for both Malaysia and Thailand is expected to exceed 7%, making them second only to China. And Vietnam, mired in an economic no-man’s-land for the last decade appears ready to make 2005 the year that it fully reappears on the world economic stage.

Nicholas Bloy, co-founder and director of Navis Investment Partners, a private equity firm based in Kuala Lumpur, says he’s never felt so optimistic about the long-term growth factors for Southeast Asia, where his firm invests 60% of all of its private equity funds.

It wasn’t that long ago that the outlook was quite grim for the Association of Southeast Asian Nations (ASEAN). The Asian Financial Crisis of 1996 to 1998 was a regional collapse of banks and businesses caused by a decade of fast growth, hyper-inflating economies and widespread corruption. Banks closed, stock exchanges faltered and the value of foreign investments-both public and private-was cut in half overnight as regional currencies fell 50% or more.

And while the economies of Japan and Korea withstood the vicissitudes of the period, the industrializing countries of Southeast Asia-Indonesia, Malaysia, the Philippines and Thailand-were largely abandoned by public and private equity investors. “By 2000 to 2001, ASEAN had disappeared from the investment horizon,” says Alastair Morrison, managing director of private equity in the Singapore offices of London-based Standard Chartered Bank.

Many of the American venture capital firms that entered the region with enthusiasm in the early 1990s ended up closing their doors or reducing their presence. Baring Private Equity Partners, HarbourVest, Pantheon, Prudential, Schroeders Capital Partners Asia, 3i and UBS (now Affinity Equity) retreated to their regional headquarters in Hong Kong. The collusion of unstable governments and poorly run banks and companies that characterized much of Southeast Asia created an environment that drove international investors from the region.

To be sure, the region boasts several of the world’s least successful economies. World Bank studies have determined that Cambodia, Laos and Myanmar, remain “among the hardest places in the world to do business,” says Aznat Taufique, senior regional manager of the International Finance Corp., the investment arm of the World Bank.

But SE Asia-with its population of 540 million and anchored by the financial engine of Singapore-is once again viewed with favor by investors. Navis’s Bloy says that the region has important advantages over private equity investing in China, in that there is a “refreshingly common outlook on the rule of law and on expectations for doing business.” Also, there are many expatriates who have worked in the region for a long time. Even those who are critical of the slow rate of change in the regulatory environment in Southeast Asia-like K.Y. Tang, co-founder of Affinity Capital (the private equity business spun out of UBS last year)-say they are looking for investments in the region.

While it’s clear that the pace of private equity investments has increased, no one is certain about just how fast the private equity industry in the region is growing. Kwee Bee Chok, executive director of the Bank of Industry-Walden in Kuala Lumpur, says there are no data about specific investments in the six countries, only reports that are indicative of general trends.

For example, Chok cites 2003 data that show that the total venture capital assets under management in Southeast Asia were led by Singapore, with $10.8 billion, followed by Malaysia, with $912 million, and Thailand, with $645 million. For the first half of this year, Chok says, new investments by venture capital firms show a significant change taking place, with Malaysia receiving $459 million, Thailand taking in $156 million, the Philippines getting $111 million and Singapore bringing in just $42 million in new venture investments. Singapore, formerly the region’s largest recipient of venture capital, has slipped to fourth place. As for sectors of interest, Chok says that 39% of the dollars went to information and communications technology and 61% went to non-technology companies.

But one has to wonder just how comprehensive even those figures are. There are, for example, significant investors in the region that disclose their investments slowly so that they tend to lag most yearly reporting summaries. Those investors include non-governmental organizations (NGOs) such as the Asian Development Bank, the Council for Developing Countries, the International Finance Corp., the Overseas Private Investment Corporation, and others who collectively invest $1 billion or more annually into the region.

Veronica Johns, a vice president for the Asian Development Bank, says that her group alone has invested $200 million in all ASEAN countries and wants to increase that to up to $200 million per year starting next year.

The trend numbers also may not track investments by corporate or strategic investors like Acer, Cisco, Hitachi, IBM, Intel, Motorola, Samsung and Siemens. These corporations are active investors in the region, but they often don’t disclose the amounts they invest in Southeast Asia.

John Hummelstad, a vice president for IBM, which invests in Southeast Asia as an institutional LP, says the growth in the region is staggering. ASEAN countries are second only to Japan in their demand for information technologies in Asia, hence IBM’s participation in strategic investors in the region, Hummelstad says.

The latest trend in Southeast Asian private equity is the appearance of Israeli-based venture capital firms, says Shki Gleitman, a managing partner at Platinum Neurone Ventures in Israel. He notes that the VC dollars are following “the shift of technology dominance to Asia Pacific.”

Doron Zinger, a venture partner at Giza Venture Capital, one of Israel’s oldest and largest VC firms, says much the same, “The main market for the products of Israeli VC startups is, in the future moving from the United States to Asia.”

Israeli firms aren’t the only ones focusing on Southeast Asia. The Partners Group, a fund-of-funds based in Switzerland, opened a new office in Singapore last October. It plans to invest across Asia, including the Southeast. “Up until 2002 we were very cautious in Asia,” says Urs Wietlisbach, co-chairman of the group. “After 2002 we increased our investments and over the next five years we want to have 10% of our assets invested into the region.” Partners is bullish about the region “because of its GDP growth, stable currencies, a capital under-hang, and because as a regional market it will overtake Europe and the United States over the next 10 years,” Wietlisbach says.

Roadmap for SE Asia

If you want to avoid the crowds on United’s flights to Beijing and the outlandish valuations of Chinese companies, here’s our assessment of key ASEAN countries. Note that we’ve excluded Burma, Cambodia and Laos, which have a long way to go before you should even consider scouting them.

Malaysia: Go Now. Malaysia replaced Singapore as Southeast Asia’s single largest recipient of new venture investments this year, raising $459 million in the first six months of the year alone. Part of Malaysia’s success is due to the government’s three separate private equity investment stimulus efforts, funded by the Ministry of Finance and the Ministry of Science and Technology. Those efforts are viewed as “part of the nation-building process” by the Malay government, says Bernard Yaw, a senior vice president at Malaysia Venture Capital Management Berhad (MAVCAP), the Malay governments’ organization that is tasked with building the venture capital industry in Malaysia.

Kwee Bee Chok, executive director of the Bank of Industry-Walden and president of the Malaysian Venture Capital Association, says that the Malaysian government has provided 60% of the venture funding in the country in the recent past. More importantly, the Malay government introduced new regulations for private equity in mid-2004, allowing 100% foreign ownership of venture funds in the country and reducing regulatory intervention when venture firms enter the country. The government is also encouraging Malaysian pensions and insurance companies to invest in venture capital within the country.

Thailand: Go Now. Thailand is looking more attractive to VCs, with a vigorous but likely peaceful election set for early next year, strong pronouncements by the government about the need to curb corruption and consolidate the banking industry, freely controvertible currency, and a strong domestic stock market that can offer exits for VC-backed Thai companies. It’s also home to the region’s largest country-specific private equity fund: Lombard Capital. Lombard, with $245 million under management, saw one its portfolio companies list on the Thai Stock Exchange in August.

Thomas Smith, a vice president at Lombard, says that the firm’s current fund will be fully invested by February of 2006 and is beginning plans for a new regional fund. H&Q Thailand, the oldest PE firm in the country, is also planning to raise a new country-specific fund, says Viripan Pulges, managing director for the firm. H&Q Thailand’s current fund is $100 million and is focused on buyouts. The Thai government is strictly hands-off when it comes to encouraging the development of the venture industry, and the country still retains onerous foreign ownership limitations. With its burgeoning economy, Thailand appears set-alongside Malaysia-to become the new anchor of private equity in Southeast Asia.

Vietnam: Go Now. Six venture funds raised $375 million in Vietnam between 1993 and 1995. Today, five of the six are gone. “Private equity in Vietnam is not for the faint of heart,” says Kevin Snowball, a managing director of PXP Assets Vietnam. After 1995, Vietnam fell off the private equity map, with no new funds created until 2002, he says.

Given that record it would have been hard to predict that this year would have seen a return of venture capital interest in Vietnam, but that is exactly what has happened with six important players targeting the country: Dragon Capital, IDG Ventures, Mekong Capital, Prudential, PXP Assets and Vina Capital. All of them, them, except for IDG, are based in Ho Chi Minh City.

It’s no cakewalk. “Being a foreign investor in Vietnam is tough,” says Hoang Nguyen, a general partner at IDG Ventures Vietnam in Hanoi. “There is no legal, commercial or technical infrastructure. VC is poorly regulated. Enforcement of [IP laws] is limited. And there are limited opportunities for exits.” Despite all that, Hoang expects things to improve and predicts that the country will experience a 12X increase in its GDP over the next 12 years.

Singapore: Safe Bet. Singapore is the private equity headquarters of the region. The tiny city-state has offices or representatives from over 150 foreign and Singapore-based funds managers, according to Kit Jong Tan, chief operating officer of the Singapore government’s TIF Ventures. While Singapore took a steep fall this year, seeing an actual decline in the amount of venture funds invested in the city-state, the deeper truth is that funds flowing into Singapore have always moved outward from Singapore itself and into the region, “with nearly 70% of Singapore’s PE dollars going to ASEAN countries,” Tan says.

Indonesia: Wait and See. Almost no private equity investment data are available for Indonesia, and little wonder. Mired in post-crisis political, religious and financial troubles, this, the largest nation in the region has only recently begun to escape from generations of despotic rule, with the first peaceful election and transfer of power in its history taking place this year.

The bombings of foreign-owned hotels and embassies and an ongoing civil war in Aceh province of Jakarta have done nothing but harm to the reputation of the largely Muslim country. Still, no less a figure than Teh Kock Peng, vice president of Singapore’s Government Investment Corp./Special Investments, says that he believes Indonesia is of most interest to private equity investors because it offers the largest potential deal size. While the average deal size is $5 million to $10 million in Thailand and Malaysia, it’s about $50 million in Indonesia, Teh says. That makes the market more attractive to an investor like GIC, which puts between $1 billion to $2 billion of PE capital to work each year. But be warned: Investors making large investments in industrial and infrastructure projects run by family members of the former rulers of Indonesia have lost fortunes. Peng and others, however, are ready to start betting on Indonesia once again, encouraged by the peaceful election last fall.

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