Corporate Partner Sze- Hui Goh comments in DealStreetAsia article titled 'Too many similar businesses in Asia make exits challenging'.

Eversheds Harry Elias Corporate Partner Sze- Hui Goh comments in DealStreetAsia article titled 'Too many similar businesses in Asia make exits challenging'. The article was first published on June 05 , 2018.

Too many similar businesses in Asia make exits challenging, says Eversheds partner

At a time when Asia remains a hotbed for deal flow, an availability of similar kind of businesses crowding the market may lead to higher valuations and even make exits challenging for many players, according to a senior lawyer at law firm Eversheds Harry Elias.

“There are too many similar products in the market. For example, take online payment platforms. I have seen at least ten online payment platforms catering to different market segments. What makes one different from another? If there is synergy in the businesses, it might make sense to consolidate such that if two or three small companies come together and consolidate, then a big player might be interested in them. If however one company turns down an opportunity, they (large investor) are going to look somewhere else for similar businesses in the market and buy that,”” said Sze-Hui, a corporate partner at Eversheds Harry Elias, in a recent interaction with DEALSTREETASIA.

Having advised large global PE and VC funds in Singapore, Malaysia and India, her practice areas cover cross-border mergers and acquisitions, joint ventures, corporate finance and corporate restructuring.

Goh, in a detailed conversation with this portal, noted that exits in the region remain a challenge.

“When we draft the documents, we provide for all forms of exits but honestly, I have not seen an IPO yet. It is extremely difficult. In Asia, the only market for IPO now is Hong Kong and the kind of companies that make it there are still traditional manufacturing type companies and some kind of China focus so they would have an entry point into the market in China and that is where one would get the valuations one wants,” she said.

Further, Goh pointed out that while consolidation has not gathered steam in the region yet, the number of deals till April this year hint that at this pace, 2018 is going to dethrone 2017 as a record year in terms of PE-VC deal flow in the region.

“I think it is going to outperform last year. So, that is the trend going forward. In terms of sectors, we are still looking at technology which is never enough. Moreover, now there are corporates coming into the picture to compete with PEs and VC investors because corporates can no longer afford to acquire just traditional businesses in order to reach a larger segment of the market,” she added.

Edited Excerpts:

How has the M&A space and the PE-VC backed deals been in the region and what do you expect going forward for this year or next? Are there enough worthwhile deals available because there is ample dry powder in the market looking for avenues to invest?

The Singapore market is a bit muted. There is enough capital but I am not sure there are enough deals in Singapore that people want to put money in and I wish it was not the case. The deals I am referring to are anything between $20 million upwards to $200 million as a bracket. So, it will encompass both VC and PE deals. I don’t think there are enough to go around in the market. Most of the deals we have been doing have another angle. It either involves Singapore as a subsidiary or they have an operating company in Singapore.

So, it has to be Asia-wide. India as a market is still hot. Further, we are increasingly seeing a lot of players in the market being bought over by bigger players who eventually aggregate those platforms. It will lead to consolidation. In a sense, the bigger companies cannot have too many in the competition, so it is a matter of getting them together and consolidating. The geographical scope is also a big thing. So, India is huge. The next country that is going to be huge is Indonesia.

We are starting to see an uptake in activity but it is slow. I have been speaking to some Indonesian law firms we are working with. Sequoia Capital, for example, has invested in Go-Jek and Tokopedia in the Indonesian market and they see the technology space in Indonesia as a few years behind India so there is huge opportunity for growth given the size of the population and the market. This means it is a good time to enter the market. These are the two countries we ought to be paying attention to. Vietnam is also quite hot right now with many corporates and investor looking to enter that growing consumer market.

You mentioned Indonesia and we have been hearing of Indonesia being the next big market with its population size, demography and others. However, the process seems to have been very slow.

I have spent two years living and working in Jakarta. It is not much but I got a sense of how things work there. The issue I think with Indonesia is that although it is probably just about as bureaucratic as India (where things are not efficiently run the way they happen in a small country like Singapore), the big difference I see is with people working in India– the deal advisers or lawyers– they are very driven and hungry. They work 16 hours a day non-stop to just push just to get things through.

The registration or obtaining approvals from the government authorities may be slow but that is not within their control. But everything that is within their control, they will persistently work with the authorities, personally work with them to make sure things are filed on time and you see that hunger which, I am sorry to say, may be the missing element in Indonesia. It is a cultural issue and that may be a problem. There are inefficiencies of the government system in both the countries but somehow I have seen lawyers and deal advisors work magic in India if they put your mind to it.

However, one of the advantages being in the tech space is you are slightly less reliant on the authorities. Dealing with infrastructure or natural resources in Indonesia, you cannot avoid the numerous approvals required. But in the tech/e-commerce space, there are slightly less approvals from government authorities required. That could be the reason why there is potential for growth in the technology space in Indonesia.

For Asia, 2017 was a record year when it comes to PE-VC investments and Southeast Asia has been getting a lot of attention too. Do you see that trend continuing going forward?

I was at an event recently and there was an analysis of deal flow till April this year and if you compare the number of deals with the first 4 months of 2017, if it keeps going at this pace, 2018 is going to outperform last year. So, that is the trend going forward. In terms of sectors, we are still looking at technology which is never enough. Moreover, now there are corporates coming into the picture to compete with PEs and VC investors because they can no longer afford to acquire just traditional businesses. They want to be able to reach their customers faster, cut out the middlemen and the only way to do it is via online platforms.

So, they would rather own the platform themselves than go through a third party. That space cannot be ignored — technology, digital transformation and as lawyers, we are talking about the development of legal technology ourselves. So, 2018 is going to be a good year in my view. Hopefully, there is so much capital out there that the market should be more buoyant than just investments into technology alone. You should also start to see a pick-up in the more traditional businesses that have been a bit muted. Oil and gas industry should hopefully start to pick in 2019, that is the expectation.

We talked about technology being a key attraction in Southeast Asia. Do you think with that attention, the investors may be missing out on the non-tech deals which may be worth the effort?

Yes, there are still non-tech deals happening in the market. They are probably not as attractive as technology deals, so people do not pick up or report on them as much. But if you come to think of it, where are the huge valuations coming from? It is from technology deals. There are no fixed assets when we talk of technology, and the valuations are high.

That is why it is grabbing the headlines and not the traditional forms of businesses. Digital businesses are going to grow and reach a wider population while traditional businesses do not reach as many people in the same amount of time. Hence if a corporate have a limited amount of money to invest, they need to be clever about how they make their money work for them.

Also, traditionally PEs are warming up to tech kind of investments as they have done a few in the past. Earlier, they were seen kind of shying away from these investments and tech was left only to the VCs. Are the lines blurring too?

That is an interesting point. I had a conversation with one of the funds about how would one define a PE investment and a VC investment when the size overlaps. The important difference for them is the stake, if they own a controlling stake such that they run the business, it would be considered a PE deal regardless of size. Whereas when the business is going to be run by promoters and the investor is going to have a financial minority stake with no actual operational control, then they consider that a VC deal.

Is this an effort from large VCs to be able to part of the journey of the company it backed in its initial days. Is there a trend emerging because otherwise once the startup reaches a certain stage, an Alibaba or a Softbank may come in to pick up a large stake?

I was having a conversation earlier with a consulting partner. We see the large valuations but when a SoftBank or Alibaba comes into the picture, he suggested, “I will say just sell now because we don’t know down the road if you will get the same valuations. So don’t quibble over $50 million and sell now.” Like I said, there are very similar type of products in the market that if you turn down that offer now, a buyer is going to look somewhere else and buy a similar business and develop that.

Traditionally what we have seen so far where one of these parties come in, the VC funds may not want to stay in the game. Don’t forget that funds are in the business of making their money work for them. These VC funds come in at an earlier stage where the valuations are still relatively low and when large investors come in and want to mop-up everything, the VCs see it as a great exit.

What is your view on exits? Has it been a challenge in Asia or rather Southeast Asia for these PE and VC firms?

Yes, to be honest, it is a challenge. When we draft the documents, we provide for all firms of exits but honestly, I have not seen an IPO yet. It is extremely difficult. In Asia, the only market for IPO now is Hong Kong and the kind of companies that make it there are still traditional manufacturing type companies with some kind of China focus so they would have an entry point into the market in China and that is where one would get the valuations one wants.

So, what are the other ways of exits one looks at? A buyout, for someone like a giant to come in and someone in a similar business. Like Walmart recently did its deal in India and it is a very strategic deal because they needed that platform to enter the Indian market. But how many of such deals happen? Out of 15 deals, I have seen two significant exits.

So, having said that the IPO market is not great, there are options for a trade sale or a strategic comes in but what remains the challenge in even these two options when it comes to exits?

I think, there are too many similar products in the market. If you have a business of an online payment software, I have seen at least ten different online payment platforms catering to different segments of the market. What makes one different from another? If two or three come together and consolidate, then a big corporate may want to acquire that. Maybe that works for some of these businesses but for the rest of the smaller companies, eventually they flounder and lose their market share and that might be the end of it.

Do you see the consolidation wave coming in or are we still far from that?

There are a few, not many.

Valuations in the region have also been on the higher side as quoted by many. Do you see it being corrected anytime soon?

As lawyers, high valuations can be perplexing to us for an asset-light business. Lawyers are conservative by nature but from my conversations with other deal advisers, they feel that the funds cannot afford to lose out when they see potential and opportunity in a business. Even though a business may not be making money yet, they may have a high valuation because of the potential for growth in that business. Funds are in the business of investing and making their money work for them so they cannot afford to not deploy that capital when they see a potential investment.

Secondly, if there is very big name involved like a Softbank or an Alibaba, people get excited so you would sit up and think that might be something good must be happening.

How do you the Chinese capital that is coming into the region in terms of a different strategy and does a deal take a little longer to close when there is one involved?

It does. At the moment in this sector, you are seeing the likes of big players like Tencent and Alibaba entering the Asia market and they are everywhere. They have the money but not quite as sophisticated as players which have been investing for a long time. It is unfair because in five years time they will catch up. I remember when I first started advising India based funds, we had to take time to explain certain concepts in the Singapore market to them which are not quite the same as in India.

So, I think it is just the process of education and so when you work with Chinese funds, you need to take time to explain the concepts to them because they are not used to a common law system. But give them another five years and they will eventually get there.

Link: https://www.dealstreetasia.com/stories/eversheds-99014/

Author: Tanu Pandey, Deal Street Asia