“OVER the past 10 years most of the largest deals in Asia and the highest volume emanate from the Chinese market,” points out Jacqueline Chan, a partner at Milbank, during a panel discussion at the 14th Asia Bond Market Summit organized by The Asset in association with the Asian Development Bank, adding that given the uncertainties of global trade tensions total cross-border M&A activity has been affected.

 

“That cross-border deal flow is currently getting replaced by deal flow in Southeast Asia, particularly in the Philippines, Indonesia, Vietnam, and developed markets like Taiwan and Singapore,” she notes. “And over the last 18 months, a lot of this has been driven by strategics and, increasingly, private equity (PE) investors finding deal flows in this market.”

 

Kelvin Lim, DBS’s executive director of syndicated finance, institutional banking, agrees. “Over the last two, three years, Chinese inbound and outbound acquisitions have slowed, leading to a significant reduction in deal volume.” But with less Chinese demand, valuations rising, and PE firms flush with liquidity, they are seeing opportunity and jumping into the market, Lim adds. “[Plus] there has always been a lot of interest in Southeast Asia but volume never quite picked up in a big way for various reasons.”

 

Matthew Liaw, CTBC Bank’s executive vice-president and head of global structured finance division, sees Taiwanese manufacturers seeking to relocate their production facilities closer to their end markets, citing Foxconn’s and Formosa Group’s investments of US$10 billion and US$14 billion respectively in the US. But PE firms, he adds, are also always looking for a target in the niche markets – a petrochemical company or one in a high-growth industry like healthcare.

 

DBS’s Lim feels there isn’t anything sector-specific about PE targets in Southeast Asia, noting that most acquisitions are defensive, growth-related or seeking to invest in industries involved in meeting the needs of the region’s growing middle class.

 

Challenges
Though Southeast Asia is the region’s bright spot, there are hurdles faced by strategic and PE investors. Few opportunities come via proprietary channels, where the PE investor or strategic is already familiar with or has a relationship with the parties involved. Most opportunities – 80% to 90%, according to Milbank’s Chan - come to market via M&A auction processes.

 

And most of these transactions, whether they are in Vietnam, Indonesia or the Philippines, are heavily structured, Chan explains. Sponsors must consider foreign ownership limitations; the opportunity and ability to take security in that space, particularly if it’s a regulated industry; contractual limitations on taking security over share pledges and the like; and, in places such as Vietnam, issues around capital controls on local currency, including hedging and convertibility.

 

Lenders must also get comfortable with other issues, such as non-recourse lending in places like Vietnam, notes DBS’ Lim. “We did a deal, the first syndicated LBO [leveraged buy-out in Myanmar] for TPG when it acquired a set of telecom towers. That wasn’t easy. It was over 12 months in the cooking.” The deal required a lot of discussion onshore and offshore to familiarize lenders with it, lay out its structure, get security, and settle capital control and currency hedging issues, he shares.

 

Once lenders and local banks doing deals in emerging markets understand and get comfortable with the new structures, they will eventually transform into a more developed model, Lim believes. “There are a lot of nitty, gritty nuances that we all take for granted in Australia, Singapore or Hong Kong.”

 

“If the financing is in local currency, local support is crucial,” CTBC’s Liaw states, pointing out that doing these deals requires a thorough assessment of their integration processes and regulatory risks, and of the borrower’s financial statements and other fundamentals, including the company’s market position, its outlook and that of the industry in which it operates.

 

In places like Indonesia where you need a local partner, the regulatory framework can present problems for PE investors. “Finding the right local partner is not easy in Indonesia,” Lim cautions. “And you have your Vietnams and Myanmars where everyone is still trying to sort of get their feet wet.”

 

Opportunities
Hurdles and challenges aside, opportunity abounds. “There are a lot of different transactions coming to market now, but the key for everyone is deciding whether it’s a deal you want to do,” Chan says. A lot of these are first-of-its-kind deals that require managing new jurisdictions that investors, depending on their risk appetite, must be willing to take up.

 

Riskier, unfamiliar deals in emerging or frontier markets are generally more structured, presenting fewer opportunities to deploy the large amounts of capital that deals in the developed markets of Japan, Taiwan or Singapore can. “There’s a lot of activity by funds in the real estate market, whether it’s in Indonesia, Vietnam or the Philippines,” Chan notes. “That’s a big driver of deal flow right now.”

 

Lin, while acknowledging that deals are getting smaller, doesn’t see lack of opportunities as a problem. “With all the economic headwinds we are facing these few years, we have seen a slowdown in strategic activity.” And with strategics backing off, he adds, there is an opportunity for PE investors. “There are a lot of PEs wanting to buy into the growth story in Southeast Asia.”

 

In developed markets, the transactions are going to be family privatizations, maybe a few big ones like Hopewell Holdings, but it’s not going to involve PE investors much, Lim notes. Most of the large corporates have already been sold, leaving only smaller, second- and third-tier acquisitions. But he sees opportunity with Japanese corporates rationalizing their balance sheets and looking to divest their non-core assets.

 

PE investors also can find opportunities in the healthcare, electronics and petrochemical industries, Liaw notes, adding that in Taiwan, there are good companies with global products looking to cooperate with skilled and connected PE investors to expand overseas. “And in the coming years [in Taiwan], there will be more transactions because of succession issues.”

 

PE investors need not focus solely on manufacturing. Opportunities could lie in service-based industries. “If you look at India [for example], a lot of tech BPO [business process outsourcing] companies are getting bought out,” Lim relates. “These are really high-growth markets.” Lenders are happy to go on a slightly higher leverage as some of these companies earn 90% of their revenue in the US and have stable cash flow, he notes. “Everyone thinks this is the next big thing.”

 

In sum, the Asian M&A market present shifting growth possibilities, smaller deals, rising valuations and flush investors. But the outlook still looks positive for dealmakers willing to break new ground in emerging markets, sniff out value in niche markets, or buy into those industries targeting Southeast Asia’s growing, high-spending middle class. As Lim points out, “it’s just a question of [finding] where opportunity lies.”