• Global inertia in fundraising and exits is forcing PE firms to think more carefully about their competencies
• Market fragmentation is more of a diversity advantage than a cross-border execution headache
• GPs must staff up to address emerging themes like sector specialization and control transactions

When Singapore-based Growtheum Capital Partners closed its debut fund on USD 567m last August, it wasn’t just the largest-ever debut fund raised in South or Southeast Asia. It was a testament to what LPs want to see in an unproven manager in an unproven region.

Growtheum is a Southeast Asia-dedicated investor. About 20% of the fund is expected to end up in India, and a five-member India team is being put together. But this is only to opportunistically support Indian companies trying to get into Southeast Asia.

The India angle was of no interest to LPs; Growtheum had no team members with experience in the country. Other than Amit Kunal, the firm’s managing partner being from India, it effectively brought nothing concrete to the table.

Everything hinged on living up to a now-familiar Southeast Asia growth story: 600m people who are rapidly digitalizing and becoming more affluent amidst short-term tailwinds related to deglobalization-driven supply chain diversification.

The story hardly needed repeating, but Growtheum had to prove it could access the overall opportunity set in a physically, politically, and economically fragmented region. When LPs wanted exposure to a certain country, the GP had to show a track record in that specific market.

It was a mix of pointing to the background of team members and demonstrating confidence in stepping outside their collective comfort zone. Growtheum adopted a model committed to rechannelling management fees into investment talent; the pending India team buildout appears to be an outcome of this.

“If you’re a Southeast Asian GP, you need to be able to do deals in any country in the region with the same convenience and talent as you would in your home market,” he said.

“Any GP able to do that will succeed. Does your team, track record, and business origination appeal equally to companies in different parts of Southeast Asia? If not, you’re a work in progress. You’re not there yet.”

It’s worth noting that Kunal previously led direct private equity investments in Southeast Asia at GIC, which alongside fellow Singaporean government-backed investor Temasek Holdings laid much of the foundations for the asset class in the region. This lends significant credibility to associated GPs whether the relationship involves a fund commitment or some other connectivity.

Growtheum received investment from Temasek in its fund, according to a source close to the situation; Kunal declined to comment on specific LPs. GIC has a policy of not investing in former employees for a few years after their departure. Kunal left GIC in 2021.

Path to provability

This experience also highlights optimism that the question of liquidity and exits is not an insurmountable challenge in the region.

Even the most patient LPs such as global development finance institutions (DFIs) have lost patience in Southeast Asia’s long-term story, demanding their existing GPs create some short-term outcomes.

For example, the International Finance Corporation (IFC), one of Growtheum’s LPs, told AVCJ in January that it was generally disappointed with returns from its middle-market GPs in the region and, like many commercial LPs, was becoming more hesitant.

The slowdown in exits is a global story, however, and Southeast Asia has enjoyed relatively warm sentiment on the issue in terms of an expected influx of strategic M&A as many global corporations seek to navigate a delicate geopolitical backdrop.

Hamilton Lane is among the investors taking this view. Kerrine Koh, the firm’s head of Southeast Asia, has observed a fledgling recovery in the regional exit market, which has coincided with the private equity space becoming more buyout-focused and increasing interest among some regional conglomerates in pursuing non-core spinouts, potentially to PE buyers.

Pan-ASEAN GPs are generally regarded as better positioned to access this expected deal flow versus country funds. However, it is unclear to what extent such developments in the market will convince global LPs to back funds that are geographically limited to Southeast Asia.

“From the perspective of an LP that is new to Southeast Asia where there may be higher perceived risk, they may be more comfortable with a more diversified pan-Asian approach before double-clicking into the subregion,” Koh said.

Nevertheless, global LPs do appear to increasingly see Southeast Asia as having graduated past frontier market status. Against a long-term trendline of national economies diversifying away from reliance on commodities and industrials, geopolitical neutrality has become significant a de-risking factor.

Last July, Niklas Amundsson, a partner at placement agent Monument Group, observed an influx of global fund-of-funds and asset managers setting up shop in Singapore to support Southeast Asian reconnaissance. He said he expected them to start making fund commitments in 2024 and 2025.

Separately managed accounts (SMAs) are put forward as one way of making these LPs comfortable with Southeast Asia, although this could require some creativity on the part of GPs in terms of structuring such vehicles – or others that allow some degree of customized exposure.

Limited internal resources will restrict many GPs’ ability to offer multiple SMAs catering to the specific needs of various LPs, industry participants said. Instead, they may need to develop bespoke structures for specific investor types, opening up vehicles to a limited number of like-minded LPs none of which are so large they create an imbalance.

Scope of interest

The elephant in the room in terms of engaging these investors – regardless of how the capital is structured – remains the demonstration of distributions. But the more region-specific challenge of defining Southeast Asia’s total addressable market will be a critical consideration around strategic positioning.

Eric Marchand, co-founder of Southeast Asia fund-of-funds Collyer Capital, touts the region as a parallel to Europe 20-25 years ago – still relatively underpenetrated in terms of PE and benefiting from a geographic diversification that is to some extent offset by cross-border scaling challenges.

In this view, a diversified, regionalized approach is necessary for mitigating currency risk, accessing sufficient deal flow, and smoothing out volatility in GPs’ performance. But regional thinking in terms of cross-bordering at all costs may not be the best way forward.

“If you’re building a business in Indonesia, selling products to Indonesians, and you’re at the start of growing your market share, why would you try to hit Malaysia, Singapore, and all these other countries?” Marchand said.

“You haven’t even completed mined your own market. Get it right in Indonesia first, then maybe sell it somewhere else – or to another owner who is better suited to regionalise the business.”

Growtheum’s playbook reflects this understanding. Most of the firm’s deals are underwritten as national champions. Any expansion outside the home market is a nice-to-have.

“A successful outcome in an export market in a four to five-year investment period cannot belong to the base case. It always has to be an upside case,” Kunal said. “We don’t have an EU kind of framework in Southeast Asia. Brands can’t just flow from one country to the other most of the time.”

LP appetite for Southeast Asia is not wholly defined by this approach to regional coverage, however. Northstar Group has raised over USD 2.6bn for its various middle-market funds since 2006, flexing a strongly Indonesia-centric strategy.

This is in acknowledgement of Indonesia representing as much as 50% of ASEAN’s total GDP as well as the costing and brainstorming efficiencies that come with having a geographically concentrated investment team.

“We are increasingly observing Indonesian companies expand into other parts of Southeast Asia successfully, such as the Philippines, and we are following this trend. That said, Indonesia remains our core market,” said Chee-Yann Wong, CIO at Northstar.

Northstar is currently deploying its fifth private equity fund, which closed on USD 590m in late 2021 with a more Asia-oriented investor base versus prior vintages. This was largely attributed to global LPs’ difficulties making commitments via video and Asian LPs’ growing interest in the region. The target was consequently lowered from USD 800m to a flexible range of USD 500-600m.

Something special

Geographic and sector specialization has underpinned much of Northstar’s traction with LPs. In addition to being Indonesia-focused, the firm has mostly targeted consumer and financial services-related themes. As these industries have digitalized, experience with tech-forward business models has become another kind of specialization.

It was casting a wider net beyond Indonesia, however, that allowed Northstar to raise larger funds. Fund II closed on USD 285m in 2010 when an Indonesia-plus strategy was first adopted. The next vintage closed on USD 820m the following year.

“Sector specialization needs to be contextualized for the Southeast Asia market, which is smaller compared to markets like India or China. In just one Southeast Asian country, the opportunities may be limited, and raising a sizeable fund may be challenging with narrow specialization,” said Sunata Tjiterosampurno, a senior partner at Northstar.

“Specializing in one broad sector across the region can provide more opportunities. Yet, as economies and consumer behavior change over time, the success of the strategy will depend on the subsectors chosen.”

The emergence of sector specialists in Southeast Asia is both a driver and a symptom of the market’s maturation.

Standout examples include industrials-focused Novo Tellus Capital Partners, which raised USD 510m for its third fund last year, and healthcare investor Quadria Capital, which closed its second flagship fund on USD 595m in 2020. Quadria’s third fund reached a first close of USD 500m last October against an overall target of USD 800m.

To some extent, specialization allows GPs to ignore geography and brand themselves as industry insiders to LPs looking for exposure to certain business themes. But like Northstar, Novo Tellus and Quadria both amplified their appeal by going intraregional, with mandates encompassing India and Greater China, respectively.

The idea of pulling in adjacent regions is not limited to specialists. Indeed, Navis Capital Partners, the only GP in the region to crack the USD 1b mark with a single fund, has invested opportunistically across Greater China and Australasia since the early 2000s. India, originally part of this opportunistic remit, was excluded several vintages ago.

Malaysia-headquartered Creador, a firm set up by Brahmal Vasudevan, a veteran of India’s ChrysCapital Partners, established an India base early in its history in 2014. The firm’s CIO, fellow ChrysCapital alum Kabir Thakur, is based in Mumbai and expects India eventually to represent 45% of deal flow. Fund V closed on USD 600m in 2021; Fund VI is currently in the market for USD 800m.

“There have been a lot of LPs that have had to review their Southeast Asia strategy because their China strategy is a no-go,” said one industry professional involved in the fundraising for Creador’s latest vintage. “But it takes a longer time to understand Southeast. For those that already have exposure to the region, it makes it easier for them to pivot.”

Quadria’s positioning around intraregional coverage emphasises the potential to improve returns through portfolio synergies in addition to providing a larger funnel for capturing investment opportunities.

The effect was notably demonstrated last year when Quadria sold Vietnam’s FV Hospital to Singapore-listed Thomson Medical Group for USD 381.4m. It was touted as Vietnam’s largest-ever healthcare transaction and the largest healthcare acquisition in Southeast Asia since 2020.

Ewan Davis, a partner and head of Southeast Asia at Quadria, said the value accretion process was significantly supported by his firm’s ability to connect FV with HealthCare Global Enterprises, the largest oncology provider in India. This resulted in the establishment of what Davis described as Vietnam’s first cancer care centre with affordable prices.

Having a control position – and, therefore, the ability to be operationally proactive – was also instrumental. Quadria acquired a 100% stake in FV for an undisclosed sum in 2017 with support from Neuberger Berman Private Equity and Germany’s DEG.

Engaged owners

Control deals in Southeast Asia are emerging fastest in high-growth industries such healthcare. But they are expected to become generally more prevalent in the foreseeable future. This means GPs must add to their operational toolkits to continue to be viewed as consequential owners.

“It’s still a minority growth investment opportunity, but it’s transitioning toward a more buyout-type mentality. I think managers that embrace that change earlier and position themselves for that will have more success,” Davis said.

“If you’re not moving this way, you’re not setting yourself up for the long term. It requires commitment and a lot of investment in capabilities, but the return we see on that is more than worth it.”

Quadria has at least 22 professionals focused on operations, including a nine-member value optimization board, a nine-member operations team, and a four member-value optimization and ESG team. This capacity has been built out over the past five years in expectation of a greater buyout opportunity.

A strong focus on team credentials is not necessarily less important in the minority growth space, however. In addition to making operational experience a condition for promotion, Asia Partners wove cultural diversity into its DNA. The co-founders hail from Singapore, Thailand, Indonesia, and Vietnam, with an 11-strong investment team covering the region out of Singapore and Jakarta.

“If you’re a mono-cultural GP, there’s something to be said for that in terms of depth of capability, but you might not have the diversity of local perspective which is needed in our region,” said Nick Nash, a co-founder at the firm. “Every company trying to be in all six ASEAN countries is going to hit bumps in the road and will need that multicultural perspective.”

Building pan-ASEAN businesses is central to the Asia Partners playbook. The firm prioritises the profile of founders in due diligence, observing it requires an uncommon international savvy to expand a business across the region.

Nash notes that the overwhelming majority of Southeast Asian companies that are successful in regional expansions tend to begin the journey in Singapore. He attributes this in part to the city-state being a magnet for the worldly personalities required to lead a company across borders.

It could be argued that this is a paradigm mostly relevant to new-economy start-ups, but even within Asia Partners’ portfolio, many of the success stories appear to be traditional businesses with a merely rudimentary layer of technology.

For example, RedDoorz, a Singapore-founded budget hotel platform that now does most of its business in Indonesia and the Philippines, is essentially a traditional hospitality management company. Similarly, Singapore-based telehealth provider Doctor Anywhere expanded across ASEAN via an omnichannel strategy that transformed it into a much more brick-and-mortar business.

Regionalization is baked into Asia Partners’ game plan such that it tends to back companies only when they are entering their fourth or fifth ASEAN market. The firm closed its second fund in January on USD 474m, short of the USD 600m target but above the USD 384m raised for Fund I.

“As important as it is to convey the regional Southeast Asia thesis to the LP community, the top priority is ultimately operational: developing the cross-regional leadership and general management skills in portfolio companies so that they can successfully launch multiple countries,” Nash said.

“The most important constituency is ultimately end-consumers, and the most important skill is the ability to serve them.”