Banking & Finance

Southeast Asia appeals to private equity firms and venture funds as trade war decimates start-ups’ valuations in China

  • Valuations rising as investors anticipate shift in global supply chain
  • Questions remain about how much the region will benefit
PUBLISHED : Saturday, 03 November, 2018, 10:02am
UPDATED : Saturday, 03 November, 2018, 12:28pm

Private-equity investors are taking a fresh look at Southeast Asia as the US-China trade war threatens to shake up the global supply chain, according to the international law firm Dechert.

Valuations of companies have been rising this year as investors anticipate that manufacturers – from apparel makers to technology companies – may shift parts of their production out of China.

But it is still unclear whether heightened interest by private-equity firms will result in a slew of actual deals, Siew Kam Boon, a partner in law firm Dechert’s Singapore office, told a media round table in Hong Kong on Tuesday, or as has happened in previous trade wars, “a reduction in trade generally”.

“[A trade war] leads to uncertainty. Uncertainty leads to cost of financing increasing,” she said. “We’re also working against a backdrop of a larger amount of protectionism in countries.”

That said, some of the biggest names in private equity have already expanded their presence in the region this year.

Private-equity giant Kohlberg Kravis Roberts opened a new office in Singapore this month on the heels of rivals Blackstone and General Atlantic doing the same in the city state this year.

Asean is perfectly positioned to profit from the US-China trade war

KKR’s co-founder Henry Kravis has said he expects the firm to look for more investment opportunities in the 10-nation region.

For the moment, the number of deals in the region has not risen dramatically, but the value has.

According to Ernst & Young, 55 private equity and venture capital deals were completed in the first half of the year in Southeast Asia at a combine value of US$23.2 billion, compared with 57 completed in the first six months of 2017 in Southeast Asia, worth US$3.4 billion.

The first half deals roll-call included the US$11.6 billion management buyout of Singapore’s Global Logistics Properties by a consortium led by China Vanke, Goldman Sachs’ former China chairman, and Chinese fund Hillhouse Capital.

Vanke leads US$11.6 billion GLP takeover, Asia’s largest buyout

And such investment by Chinese firms is pushing up private-equity valuations in the region, according to Dechert.

“There was a time in Asia when people thought they could buy things cheap. Entrepreneurs, maybe a little naively, did not understand the metrics. The early wave of private equity into Asia was about buying cheap,” said Dean Collins, a Dechert partner in Singapore. “Now, it’s about buying fairly [and] adding value.”

Boon said she expects a rise in Chinese strategic outbound mergers and acquisitions into the region as companies look to boost production capacity and diversify their supply chains.

Rising valuations already have some private-equity firms re-examining what kind of deals they consider, Boon said. For example, Indonesian private-equity buyers are looking at debt funds, rather than traditional equity deals because of the higher prices for companies.

But there are some good deals to be had, compared with other parts of Asia.

Valuations for technology unicorns in the region, such as GrabTaxi and Go-Jek, may be “highly inflated,” she said, but are still not as expensive for private-equity buyers as investing in similar technology firms in China.

David Cho, a partner in Dechert’s Hong Kong office, added that private equity firms are also on the trail of strategic mergers more than ever.

“You’ve got financial institutions from China looking to expand because of market saturation in their country. You’ve got Korean banks trying to compete with the credit funds doing different types of alternative investments,” he said.

“There’s so much liquidity in the market and different types of capital waiting to deploy.”