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KKR Sees Southeast Asia Investment Opportunity on Wealth Growth

KKR & Co., the private equity firm run by Henry Kravis and George Roberts, sees investment opportunities in Southeast Asian companies that will benefit from economic growth and increased consumer spending in 2013.

Consumer goods companies, retailers, education and health-care industries are attractive as urbanization spurs more people moving into cities, forming a large pool of middle class, said Ming Lu, member of KKR and regional leader of Southeast Asia. KKR is focused on bigger economies of Singapore, Malaysia, Indonesia, Thailand, the Philippines and Vietnam, he said.

“We will see an increase in investment opportunities and an increase in activities in the Southeast Asia region,” Lu said in a telephone interview on Dec. 3. “As markets slowly improve and stabilize, we will start to see more opportunities that we can actually capitalize.”

KKR, which set up its first office in Asia in 2005 and opened its seventh in the Asia-Pacific region in Singapore in October, is raising a $6 billion Asian fund and has commitments for about two-thirds of that amount. Private-equity deals in Southeast Asia are expected to rebound over the next two years, according to research by Bain & Co.

Private-equity firms pool money from investors with a mandate to buy companies within about five to six years, overhaul and then sell them, and return the funds with a profit after about 10 years. The firms typically use debt to finance the deals and amplify returns.

‘Burgeoning Economy’

“The relative stability and continuous growth of Asian economies and business in the region is an attractive proposition for managers looking to take advantage of new and growing business opportunities,” said Mitul Patel, manager of Asia Research at Preqin Ltd. in Singapore. “Private equity managers are realizing that making a mark in Asia before their competitors do could reap much longer-term rewards.”

Lu said valuations look attractive for investments amid global challenges including low growth in the U.S, Europe’s sovereign debt crisis and limited growth prospects in China and India.

Worldwide, the value of private-equity deals announced in the third quarter fell 29 percent to $95.1 billion from a year earlier, with leveraged buyouts rising 62 percent to $39.3 billion, according to data compiled by Bloomberg.

“While we don’t see that 2013 globally is going to be a great year, we think this is a great time to invest,” Lu said.

Benign Valuation

“Slow growth will translate into a benign valuation environment, which in our point of view, is a great time to invest,” he said. “If you compare the valuations versus the potential growth, we think that relationship today is better than when the valuations were sky high and growth is robust like 2007 or 2010.”

Private-equity deals in the region this year are expected to match 2011’s $5.3 billion or post a decline, before staging a rebound over the next two years, said Sebastien Lamy, a partner at Bain, citing the company’s research. The investments dropped from a peak of $12.3 billion in 2007, according to data from the corporate consulting firm.

Funds that have primary focus on Asia have risen to 270, reflecting demand and have surpassed the 221 of them that are focused on Europe, according to data compiled by Preqin, a London-based research firm.

“Regions such as Asean have become a hot topic across the industry,” said Preqin’s Patel, referring to the grouping for Southeast Asian nations. “The arrival of KKR and other managers to these shores and the increased percentage of global funds that larger mangers are allocating to Asia is indicative of this trend.”

‘Patient Capital’

Navis Capital Partners Ltd., which manages $3 billion of private and public equities, said in October that private-equity investors are set to increase bets in Southeast Asia.

In 2013, sluggishness in public markets and slowing global growth may impact potential exits, Lu said, adding that KKR is “very relaxed about this” because of its strategy to invest in “strong market leading companies with strong business fundamentals.”

“We are long-term patient capital,” Lu said. “We’re not looking for next year; we’re looking at the next five years.”

KKR opened the Singapore office to expand investment activities in Southeast Asia, in which the company has been investing in for more than six years in deals exceeding $1 billion, Lu said. KKR now employs almost 100 executives in the region.

KKR expects industries including natural resources to provide opportunities because they make up large portions of economies, Lu said. For manufacturers, those that are coming out with globally competitive technology are attractive, he said.

“We believe that the region will resume robust growth in a couple years and that’s when the valuations will recover and growth will recover, so I am quite optimistic for 2013,” Lu said. “This is when you really need to take the medium-to-long-term view about the overall economy and about the company performances.”

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