The Rise of Southeast Asia’s Hyper-Growth Companies

Tan Choon Hong and Sunata Tjiterosampurno, Co-Chief Investment Officers at Northstar Group, discuss how digital transformation is creating rich opportunities for private equity in the region

What makes Southeast Asia an interesting market for private equity?
The aggregate Southeast Asian economy is more than $3tn, having quadrupled in size since 2000 and more than doubled since 2010. Few emerging markets have this sort of track record. Southeast Asia has a young, growing population, 65% of which is expected to still be in the working-age cohort in 2050 (China’s figure is projected to fall to 60% by then).  

Rapid digitalization in the region is fueling the rise of hyper-growth companies, and a number of start-ups have crossed the landmark $1bn valuation supported by an expanding list of global investors. This same pattern played out in China over the past decade. Southeast Asian companies and investors have the advantage of seeing how certain digital themes have played out in China and the US, which helps de-risk similar investments in the same themes in Southeast Asia.

Today, Southeast Asia is also a more important component of global supply chains. Rapidly rising labor costs and escalating China-US tensions are driving a shift away from China. The COVID-19 pandemic further highlighted the risk of supply chain concentration. Southeast Asia has the population, the technology, and the resources to fill the gap.

What is the best approach to investing in Southeast Asia?
Investors should recognize that although many commonalities exist in the region, Southeast Asia is not a single homogeneous market. Each country is at a different stage of economic development, with different levels of maturity in terms of consumer goods and services penetration. We have seen a number of global buyout funds establish a presence in Singapore over the past decade with a mandate to cover multiple markets. It is not easy. You need to have strong deal-sourcing networks, relationships with trusted advisors and familiarity with local culture, law, and politics – all these require years to build.  

Northstar initially invested only in Indonesia – it took almost six years before we did a deal in Singapore, and another five years before we did a deal in Vietnam. We understood early the importance of diversifying across the region, but we knew that to do that profitably, we would have to grow slowly into additional markets. Today, we operate across five countries, and have successfully replicated winning business models from one market in another. For example, we leveraged our experience with Bank BTPN in Indonesia to help Thai Credit Retail Bank transform into a leading micro-finance lender, generating solid returns in Thailand’s relatively consolidated and highly competitive banking market. We have also backed Zenius, which is bringing a well-established China-style edtech model to Indonesia.

Indonesia has always been a focus market for you. What underpins your conviction?
During the initial years that private equity was active in Indonesia (2005-2015), returns were principally driven by post-Asian Financial Crisis recovery plays and the global commodity upcycle. Valuations were attractive during this period. Over the past five years, new opportunities have emerged in the hyper-growth digital economy. The confluence of high smartphone penetration, rising consumption, and the availability of capital led to a surge in digital start-ups. At the same time, conventional businesses with solid business models continue to enjoy respectable growth. The digitalization trend will continue to overcome inefficiencies in the economy, and we continue to like financial services and consumer mass-market businesses.  

The Indonesian Government is laying the foundations to deepen the economy. President Jokowi successfully focused on infrastructure projects during his first term and has recently pushed through the so-called Omnibus Law that is designed to improve the ease of doing business in Indonesia and attract more foreign investment that will lead to job creation and further economic growth.

How is digitalization impacting private equity in Southeast Asia?
Digital investments in Southeast Asia will present a significant opportunity for private equity over the next decade. COVID-19 has accelerated this opportunity. In 2019 Facebook and Bain stated there would be 310 million digital consumers in Southeast Asia by 2025. They now expect that number was reached at the end of 2020.

Looking at China, Preqin data shows that private equity managers that invested significantly in technology companies outperformed in six of the nine vintage years from 2008 to 2016 (+2.5% net IRR on average across all nine years). The line between traditional and digital companies is becoming increasingly blurred. Digitalization in Southeast Asia is no longer about new digital players setting up online channels and disrupting less efficient incumbent business models. It has evolved to a focus on improving both business processes and the total customer journey by integrating online experience with an offline service. We see this happening across industries, and this is what Northstar’s investment in Bank Jago is about – taking established/traditional banking infrastructure and overlaying a fully digital interface on top to serve consumers better.

What is your strategy for investing in hyper-growth companies?
The valuations of hyper-growth businesses do not usually follow a linear trajectory. Rather, their valuations tend to rise exponentially, such that by the time they fundraise from traditional private equity investors they have become unicorns. Since we target 3-4x returns for early-stage deals, it is difficult to underwrite investments at such valuations. The fundraising processes for these companies are not like those of typical growth companies, either – they do not allow the luxury of several months of due diligence. So, we have concluded that you have to be early, potentially even from the pre-Series A stage, and conviction has to come from comfort with the management team, their business model, and their ability to track and execute on what they have promised to investors.  

Looking at our investment in Gojek, we had known the founder, Nadiem Makarim, for some time, as he had previously worked at two of our other portfolio companies. We helped Nadiem kick off app development pre-Series A and were thus able to track Gojek’s performance from the very beginning. When it came for Gojek to raise a Series B round in 2015, which was quite early for our funds at that time, we knew that Nadiem was executing the business plan well. That gave us the conviction to invest across the B and C rounds even though Gojek was still losing money – traditionally a big hurdle for a private equity investor. We now actively track many high-growth companies from an early stage, and several, including agtech start-up eFishery and Zenius, are now in our portfolio.

About Northstar Group 
Northstar Group is a Singapore-headquartered Southeast Asia-focused private equity firm managing more than $2.2bn in equity capital. Founded in 2003, Northstar’s investment strategy is focused on capitalizing on the underlying growth drivers across Southeast Asia, with a focus on the consumer sector, financial services, and the digital economy.