April 3 (Bloomberg) -- Thailand, Vietnam and the Philippines will see the strongest increase in private-equity transactions in Southeast Asia this year as buyouts in the region struggle to recover, according to Bain & Co.
A growing middle class will push up demand for consumer goods such as food, fashion and banking services in those countries, which have experienced fewer deals compared with the more saturated markets in Singapore and Indonesia, said Sebastien Lamy, a partner at Bain, which provides management consulting services to the private-equity industry.
“Especially in Vietnam, Thailand and the Philippines, private equity will be surfing on the wave of the consumer story,” Lamy, a Singapore-based private-equity specialist for Southeast Asia, said in an interview yesterday. “The growing middle class is set to push up investments in companies focusing on those areas.”
Private-equity investors are counting on consumption growth in the three countries to deploy capital and aid a revival in transactions in Southeast Asia. The value of buyout deals in the region fell more than 50 percent to $4.9 billion last year from a peak of $12.7 billion in 2007 as credit slowed following the 2008 global financial crisis, according to Bain.
Thailand last week increased its gross domestic product growth forecast for 2013 to 5.3 percent from 5 percent, while Vietnam approved a master plan in February to revamp the economy. The Philippines achieved investment grade for the first time as Fitch Ratings raised its assessment last week, rewarding President Benigno Aquino for leading a growth resurgence after the nation lagged behind peers for decades.
“The rise of the middle class will continue to be the big story for Southeast Asia’s economies over the coming years,” said Gareth Leather, a London-based Asia economist at Capital Economics Ltd. “More and more people have more money in their pockets so that they don’t only spend on surviving goods, but also in a more discretionary manner on consumer goods.”
Buyout firms bought companies in Malaysia, Singapore and Indonesia valued at a combined $2.7 billion in the past year, according to data compiled by Bloomberg. That’s more than 12 times the value of transactions with targets in Thailand, Vietnam and the Philippines.
The main sectors for private-equity deals in Southeast Asia, where most of the region’s 650 million people will be middle class by 2020, will be consumer goods like food and beverage, consumer finance, health care and industrials, Lamy said.
Consumer spending on food and beverage in the region that also includes Cambodia and Myanmar will jump to about $350 billion in 2020 from less than $200 billion in 2000, according to a 2011 analysis by consulting firm Accenture Plc. Food and drink spending surpasses every other category, including housing and transport, according to Accenture.
“The economic outlook for the region is good,” Lamy said. “Compared to other parts of the world, the Asia-Pacific region is still underpenetrated in terms of private-equity investments.”
Lamy said in November that Southeast Asia’s private-equity investments will pick up this year or next, reversing a half-decade slump as the region’s improving economic outlook attracts funds.
“The first quarter doesn’t seem to have been extremely active,” Lamy said yesterday. “However, the market will rebound. The question is when and at what pace. It’s not a given that the rebound will be this year.”
Obstacles include differing views on valuations from buyers and sellers, and competition from non-private-equity firms, he said.
The stock markets of Thailand, Vietnam and the Philippines are among the 10 best performers this year among 94 global equity indexes tracked by Bloomberg. Vietnam’s VN Index had the biggest gain in Asia, advancing 22 percent in U.S. dollar terms, while benchmark gauges in the Philippines and Thailand climbed about 16 percent.
Transaction prices have gained because companies have been more aggressive in Southeast Asia, “snapping deals” from private-equity firms last year, Lamy said.
Expecting higher offers was the biggest impediment to private-equity deals in the region this year, according to about 85 percent of respondents in an Ernst & Young LLP survey released in January. Competition from cash-rich companies was the most significant challenge over the next 12 months across the Asia-Pacific region, according to 79 percent of respondents in the Ernst & Young survey.
The industry-wide internal rate of return in Southeast Asia will be between 15 percent and 25 percent over the next five years, Nicholas Bloy, managing partner at Navis Capital Partners Ltd., said in January. Navis Capital, which manages more than $3 billion, said at the time it will open offices in Vietnam and Indonesia.
KKR & Co., the private-equity firm run by Henry Kravis and George Roberts, opened its seventh office in the Asia-Pacific region in October in Singapore.
Private-equity firms globally are under increasing pressure to invest capital as the funds committed by investors are at the highest in at least 10 years, Lamy added. The so-called dry powder -- money committed but not yet invested -- by funds focusing on the Asia-Pacific region rose to $131 billion last year, almost eight times the amount in 2003.
“The private-equity companies in Southeast Asia are on the starting blocks, waiting for the gun to fire the signal,” Lamy said. “Still, they might have to wait a bit longer.”
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