• Southeast Asia’s family-dominated economies appear set for more buyout activity
• The revitalisation of struggling conglomerates is the most prospective deal driver
• Private equity must be sensitive to clashing agendas, initially settling for co-control

When Prashant Kumar, a partner at KKR, relocated from India to Singapore last year to lead the firm’s Southeast Asia private equity team, it highlighted a gradual shift in industry thinking about the region. The opportunity for control is gradually increasing in an historically minority investment-oriented landscape.

The move came as part of a broader leadership reshuffle, which saw KKR’s existing Southeast Asia head transition to an advisory role. Kumar, whose experience in India includes leading several buyout transactions, was brought in to recreate that playbook with support from Capstone, the firm’s in-house operations unit.

India’s annual average buyout volume has risen 4.5x in India over the past five years, according to AVCJ Research. The outlook for Southeast Asia to follow suit remains clouded, however, by important distinctions between the two regions.

Buyouts expanded in India under a single regulatory jurisdiction, where a bankruptcy code, for example, was able to spur deals by forcing businesses to clean up their balance sheets. At the same time, a greater presence of technology services relative to traditional industries has lent India’s middle market a more control-oriented profile versus Southeast Asia.

Kumar hesitates to brand KKR as a buyout investor per se, noting that proactive minority deals remain part of the strategy. But he senses a rise in control deals in Southeast Asia across succession, carve-out, and sponsor-to-sponsor sale situations. This is mostly the outcome of a general maturation of the regional economy rather than any specific regulatory or sectoral drivers.

“It’s still a minority of what’s getting done, but we are seeing a larger number of control deals come to market. We’re quite excited about that flow,” Kumar said.

“It’s certainly significant enough that we need to be on the ground with a large team devoting energy. We have about 30 people in the region across strategies, including Capstone, so we’re ready. We see the same wave of control deals coming that we saw in India.”

Moving the needle?

KKR’s efforts in this space illustrate the breadth of the perceived opportunity in terms of deal sourcing. Standout deals include Singapore-based shipping container manufacturer Goodpack, acquired as part of a succession-driven SGD 1.4bn (USD 1bn) privatisation in 2014, and Metro Pacific Hospital, a Philippines hospital chain carved out from MPIC in 2019 for a reported USD 685m.

Most recently, it bought Medical Saigon, one of the largest eyecare chains in Vietnam, from Heliconia Capital, a private equity firm owned by Temasek Holdings. Sponsor-to-sponsor sales currently account for less than 20% of the firm’s Southeast Asia control activity but this is expected to tick up. Kumar declined to comment on Medical Saigon.

Industrywide, the anecdotal feedback is that control deals are now more available and workable in Southeast Asia versus five years ago. In lieu of a broad statistical trend, the recent emergence of sizeable healthcare buyouts has helped inform this narrative.

Five of the six buyouts in Southeast Asia that surpassed the USD 200m mark in the past 48 months are in healthcare. The highest profile of these deals came last November, when TPG-backed Columbia Asia Healthcare acquired Ramsay Sime Darby, a Southeast Asian hospital joint venture between Australia’s Ramsay and Malaysia’s Sime Darby, for about USD 1.5bn.

TPG is also active in the middle-market segment that represents the bulk of Southeast Asia deal flow. In 2020, the firm partnered with Northstar Group to carve out an 80% stake in Singapore’s Greenfield Dairy from pan-Asia agri-food giant Japfa for USD 236m. Two years earlier, it established Singapore-based Pathology Asia by rolling four smaller healthcare acquisitions.

Dominic Picone, co-head of Southeast Asia at TPG, describes the strategy as allowing companies to transition from founder or family ownership to large-scale institutional ownership, whether in public or private markets.

“A typical scenario would be buying shares from a business founder or a smaller private equity firm in a series of transactions. During the course of our ownership, the business would come to be managed independently of its founders, which will then set the company up for a large-scale private equity deal or possibly a public offering,” he said.

“This is a very natural life cycle of a business where private equity firms play an important role in helping companies transition from mid-size to large-size.”

Still, the buyout wave – whether in large or mid-sized businesses – is yet to materialise in raw numbers. Over the past 10 years, annual deal flow has ranged from USD 1bn to USD 14.9bn, without demonstrating any discernible trend apart from infrequent bumper buyouts skewing headline data.

Taken as a share of overall private equity investment in Southeast Asia, buyout deal flow has decreased in the medium term. During the five years from 2014 through 2018, the buyout share averaged 44%. That number fell to 19% during the five years from 2019 through 2023 (although Ramsay Sime Darby was excluded because it is classified as a bolt-on acquisition).

To some extent, this can be explained by a dilution effect caused by the expansion of the regional venture capital market, but even when VC deals are stripped out, the declining pattern holds. Excluding VC, buyouts averaged 54% per year in 2014-2018 and 28% in 2019-2023.

Divestment dreams

The most convincing statistical evidence that more control deals are on the way derives from the fortunes of the region’s ultimate economic gatekeepers – conglomerates.

Recent data from EY Parthenon frame Southeast Asian conglomerates as value destroying organisations with stagnant portfolios that are not future-proofed. It found pure-play companies in the region were outperforming conglomerates in terms of total shareholder returns by as much as 37% in some sectors.

Listed conglomerates in ASEAN trade at a 34% discount to their respective markets in terms of price to book ratio, according to EY. This compares to an only 7% discount for conglomerates in the US and the UK.

In Singapore, which accounts for more than two-thirds of the region’s buyout activity in dollar terms, listed conglomerates trade at a 44% discount to the local market’s median price to book ratio.

Among both family and state-owned conglomerates, the weakness is attributed to a relative failure to digitalise and an historical reliance on capital intensive industrial sectors with waning investor appeal. Exposure to high-growth areas such as healthcare and technology, media, and telecommunications (TMT) is marginal.

Vikram Chakravarty, EY’s ASEAN strategy and transactions leader, observes that this decay is playing into private equity’s hands. The required transformations – notably around artificial intelligence and sustainability – are expensive to implement, requiring a rethink of capital allocations. But control will be mostly ceded via gradual relationship building rather than immediate contractual wins.

“You have to go into this knowing it’s a multi-year game. We’ve seen that over a period of time, private equity is able to increase its stake take more control, and eventually list or sell quite successfully,” Chakravarty said.

“I can tell you now that this is top of mind for both private equity and companies, and over a period of four to five years, we will get to that outcome. But this is a mating dance, which means things can go awry. Therefore, both sides need to be patient, sensible, and thoughtful about building a working relationship that gives you that outcome.”

Chakravarty added that Indonesia was a particularly active market in this regard, with family-owned conglomerates increasingly separating out subsidiaries, not just at the holding company level as they typically would, but as standalone business units that can be spun off. He claims to have tracked several “decent-sized” spinouts across Indonesia, Malaysia, and Singapore in the past two years.

Much of this opportunity set was precedented by CVC Capital Partners, which has achieved several control and minority-joint control transactions with Indonesia’s Lippo Group since 2010, when it acquired Lippo-owned Matahari Department Store for an enterprise valuation of USD 892m.

Motivating sellers

Buyout deal flow remains sporadic, however, even as megatrends related to increasing sustainability compliance requirements and pandemic-accelerated digitalisation mount pressure to divest. The lag is connected to a mix of factors including recently weakened technology sentiment, unreliable availability of leverage finance, questionable asset quality, and general conglomerate conservatism.

“COVID has changed many people’s minds. Some people thought their retirement was, say, five years away, but now they’re thinking, ‘Why don’t we sell the business before we get disrupted given the rapid pace of change driven by technology,’” said Sunil Mishra, a Singapore-based partner at fund-of-funds Adams Street Partners.

“For high-quality businesses owned by conglomerates though, I think they would only give up control in special situations where they need liquidity. That can and will happen in Southeast Asia, but for market-leading businesses, which is what PE wants to buy, I presume it’s going to be more co-control and partnerships.”

Thomas Lanyi, head of Southeast Asia at CDH Investments, sees openings for co-control situations where private equity can bring needed competencies to the table in terms of governance, M&A, and cross-border expansions. He said his firm is currently weighing potential buyouts in all its target markets across the region.

CDH’s standout case-study in this context is arguably Singapore’s Aver Asia. The private equity firm acquired the construction equipment supplier in 2015 for an undisclosed sum, providing a succession solution for the owners, two brothers who retained a large minority stake. In 2021, Japan’s Sumitomo Corporation acquired 100%, delivering what Lanyi called a “very successful” exit.

CDH is currently partnering with an Indonesian group to jointly acquire a Vietnamese asset. According to Lanyi, the pending transaction demonstrates how private equity can take co-control by plugging corporate capacity gaps in M&A and entering new markets (CDH has significant experience in Vietnam) if long-term alignment can be defined.

“What you have to acknowledge is that these strategics don’t buy businesses to flip them in a few years. If they make acquisitions, nine times out of 10, they do not want to resell them. So, they work on very different timelines,” he said, while declining to comment on deal specifics.

“The key questions you need to answer in these situations are, how do we conduct this business in such a way that we both benefit from the value created in a fair manner, and how do we eventually exit at as high a valuation as possible.”

Thailand’s Charoen Pokphand Group (CP Group), one of the oldest and largest family conglomerates in Asia, expects to do more co-control acquisitions of separate ASEAN businesses in succession situations alongside private equity in the foreseeable future.

Sean Glodek, head of CP Group investment subsidiary CT Bright Holdings, said that conglomerates could facilitate conversations with families circumspect of private equity in such situations. For their part, PE investors must be sensitive to the fact that these deals are not purely financial in nature.

“We see a lot of potential for family transition that would generate businesses where oftentimes we would want to partner on something,” Glodek told AVCJ last April. “There would be synergies [with CP Group companies] but we cannot build another team, whereas private equity actually specialises in that. So, there’s that symbiotic relationship.”

Repeat partners

Insufficient management-level talent is widely seen as a constraint on buyouts in Southeast Asia. To some extent, this can be offset by the repeat partnership approach demonstrated by CVC and Lippo, which implies a build-up of significant trust in the management capabilities on both sides of any given deal. Often these are minority acquisitions that pave the way for eventual control.

Vietnam’s Masan Group is one of the most active conglomerates in this sense; TPG and KKR have both invested in the different parts of the group on various occasions. Interestingly, it appears to be setting an example for smaller companies locally.

Diversified retailer Mobile World, for instance, received investment in 2007 from Mekong Capital, which also went on to invest in a Masan subsidiary. Lanyi, a director at Mekong at the time, participated in the Mobile World deal. By 2013, Lanyi was with CDH, which bought a 20% stake for USD 110m. Last month, CDH acquired a 5% stake in a grocery subsidiary of Mobile World for a reported USD 72m.

“The biggest risk in any one of our transactions is really the people risk. The execution risk, the governance risk – all of that is associated with the people you’re working with. If you have a 15-year history with no governance risk and a team that’s made you money on more than one occasion, it’s an obvious choice to work with them again,” Lanyi said.

Best practice for establishing new relationships is largely about demonstrating skillsets and value-add capacity beyond those of the family or conglomerate in question.

Investors advise presenting a substantially more ambitious expansion plan that the counterparty would otherwise be able to formulate, while showcasing an entrepreneurial mindset, including an ability to move unbureaucratically on hiring talent.

Bureaucracy issues aside, global firms have a distinct advantage in this process by virtue of their broader networks and internal operational resources. KKR, for example, in addition to being able to point to case-studies from Capstone, brings portfolio CEOs to introductory conversations to explain the firm’s approach to functions such as bolt-on acquisitions.

“Initial conversations are always about sitting down with both the owners and the management team just to share what we’ve done and our experience in this space,” KKR’s Kumar said. “We invest time by offering help, including leveraging our networks and global experts and portfolio companies. Maybe 10% of those situations convert into a deal.”

KKR places significant importance on personal chemistry in such interactions, referring to the philosophy internally as “like and trust,” meaning founders should both like and trust their counterparts at the private equity firm. Picone of TPG similarly emphasises warm individual relationships and honesty about goals as ways to pre-empt conflicts in initial conversations.

“The regular informal chats that we have with our partners are just as important as documents in making sure that parties have a current view of each other’s position to avoid surprises,” he said.

“Importantly, for family-owned businesses, we often face challenges related to succession and legacy, which are harder to navigate. We invest a lot of time in understanding sentiments around these topics to avoid potential conflicts down the road.”

Alignment on exit

All the efforts around pursuing repeat partnerships and committing to long periods of relationship-building risk becoming useless in preventing conflicts of interest, however, if exit mechanisms are not clearly and formally defined at the time of a transaction.

In co-control situations, it can be a delicate matter. Priorities include ensuring that the economics of the joint venture cannot be skewed inappropriately toward one party, preventing distortion of fair economic value during the holding period, and agreeing how the business will be priced at the time of exit.

Giving the family counterparty first right of refusal is generally part of the equation. In some instances, the eventual buyer can be agreed on day one. Navis Capital Partners makes this a feature of every transaction, although the approach appears most suited to succession scenarios rather than carve-outs or co-control acquisitions alongside conglomerates.

The private equity firm, which invests almost exclusively in Southeast Asia, insists on control in every deal, with the selling family or entrepreneur retaining a minority stake, typically in the range of 40%. There is an understanding that both parties will necessarily exit 100% together to a trade buyer at the end of the holding period.

“We convince them by saying, ‘The dollar you receive for your 60% today will be three dollars for your 40% in five years’ time. Come on the journey with us.’ If they believe that – and they don’t always do – then you have the basis for a great partnership,” Nicholas Bloy, co-founder of Navis, told the AVCJ Private Equity Forum Singapore in April.

This is not to say that a partnership mindset is less critical when negotiating a 100% acquisition, particularly as the asset being sold will likely continue to be associated with the founding family.

Family groups in Asia play cultural roles in their home markets that transcend their immediate economic impact, meaning face and prestige contribute to stymied deal flow and ramped up pricing.

“One of the things I’ve noticed about rich families is they don’t like giving away things cheaply or with a lot of upside. They’re dealing with intergenerational issues, but they’re also dealing with risk protection issues. They’re very interested in preserving legacy and reputation,” Andrew Thompson, head of Asia Pacific private equity at KPMG, told the forum.

Yet the need for diplomacy and patience when engaging family groups and conglomerates should not make investors wary of submitting aggressive proposals. The key to achieving this balance is to confidently assert private equity’s potential as a governance and operational problem solver while recognising that issues around control and exit planning will require time and a lighter touch.

Just as many longstanding traditional businesses in the region must rethink their role in the economy, in part by embracing private equity, so must private equity reposition itself as long-term business partner rather than financial champion for those companies.

“I think private equity should have the audacity to go for the big, complex conversations. They shouldn’t be playing on the edges. They should talk to large conglomerates about business wins that they can help effect,” said EY’s Chakravarty.

“This is something conglomerates are eager to listen to, but private equity needs to have the courage to go there. Many investors have been waiting on the sidelines, hoping these deals will come to market, but typically a family-run business is not going to put this on the block.”