Navigating Southeast Asia: Private Equity Prospects Amidst Geopolitical Tensions and China’s Influence

By Lily Raaka, Director of Plocamium Global Insights: Navigating Southeast Asia: Private Equity Prospects Amidst Geopolitical Tensions and China's Influence

Southeast Asia presents a compelling landscape for private equity (PE) investments, particularly in Vietnam, Thailand, and the Philippines. These markets offer unique opportunities, yet they are not without challenges, especially as geopolitical tensions and China's economic strategies, such as those influenced by the People's Bank of China (PBOC), play a significant role.  Vietnam's growing manufacturing and healthcare sectors are attractive, but investors must navigate the complexities of U.S.-China trade tensions that impact regional dynamics. Thailand's market, favorable for small PE firms, is influenced by political instability and its economic ties with China. Meanwhile, the Philippines' burgeoning digital economy offers potential, though it is tempered by corruption and geopolitical risks. Understanding these factors is crucial for investors seeking to capitalize on the region's potential while managing the inherent risks. Vietnam Vietnam is a strong candidate for healthcare and manufacturing investments, especially with the 2013 Comprehensive Partnership, which focuses on a multi-faceted approach to bilateral cooperation, including economic efforts, encouraging U.S.-Vietnam cooperation.  Government & Economic Context Vietnam has become a popular region for PE ventures in recent years because of government initiatives. The Ho Chi Minh Stock Exchange (HoSE), which opened in 2000, expanded to a stock exchange in 2007, which allowed Vietnam to be internationally accessible and made it a more financial region. It has been documented that “ongoing trade tensions between the US and China, coupled with rising labor costs and other challenges” have led many investors to explore new areas in the region – the HoSE’s impact on Vietnam’s economic growth makes Vietnam’s prospect for becoming a manufacturing partner with the US very promising. Additionally, when Vietnam joined the World Trade Organization in 2007, it established itself as open to international exchange, leading to foreign PE involvement in Vietnam.¹  Lastly, the Law on Investment outlines how businesses cannot conduct themselves, clearly delineating how foreign investors can approach business endeavors. The 2013 Comprehensive Partnership, which focuses on a multi-faceted approach to bilateral cooperation, including economic efforts, encourages U.S.-Vietnam cooperation. This Partnership states it “is the first U.S.-Vietnam private sector agreement under the U.S.-Asia Pacific Comprehensive Energy Partnership, and the first renewable energy project to be financed, in part, under a $500 million memorandum of understanding executed between the Export-Import Bank of the United States and the Vietnam Development Bank.”² This government-backed initiative demonstrates Vietnam’s desire to be active in global finance, which encourages firms that want to start involvement in Vietnam. Furthermore, the Vietnamese government increased foreign shareholding from 49% to 100%, making it an even more popular investment opportunity.³ Risks & Challenges When venturing into a new country or culture for investment, it is crucial to grasp the differences and specific restrictions for foreign investors. In the case of Vietnam, a key step is to understand the Law of Securities, which clearly outlines the requirements for listing on the HoSE. These include the necessity for the firm to be publicly traded in Vietnam, have operational securities in Vietnam, and comply with local laws.³ Moreover, the firm should have a successful operating history of two years, no outstanding debts, and 15% of the voting shares held by 100 or more shareholders, each with less than 5% of  the voting shares.³ Risks for investing in Vietnam include frequently changing laws, corruption, and intellectual property rights. Regulations surrounding foreign businesses can change often, so foreign investors should work closely with local enterprises and create an infrastructure that relies on Vietnamese laws. Corruption is a persistent issue in Vietnam, but some areas have corruption deeply embedded in their practices. In addition to its presence, the Vietnamese government has taken great measures to combat corruption, so foreign firms should rely on government outlines instead of historical practices that could include corruption.⁶ Vietnam is a leader amongst Asian countries in anti-corruption law because they have established specific governance around improving businesses. Lastly, intellectual property rights in Vietnam are an evolving subject, so foreign companies should take legal precautions before investing.⁴  Tips for Success  To succeed in Vietnam, PE firms must be very active with their accounts; investors should be familiar with the investment laws in Vietnam and understand the culture in general because success is more probable in firms that adhere to local practices. Foreign PE firms have been successful because they provide monetary and management support, helping expand Vietnamese companies globally.¹ Specific areas for investment that have demonstrated potential for success are healthcare and manufacturing. These many factors have contributed to increased U.S. involvement in Vietnam, and despite conflicts on specific human rights perspectives, their efforts to cooperate persist. Additionally, remaining aware of laws implicating foreign businesses, corruption, and IP is crucial for success. Vietnam has demonstrated economic strength for the past decade and already has a foreign PE presence, but it remains a strong candidate for foreign investment.

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Thailand While originally, Thailand seemed to have great potential for all foreign investment endeavors, after further exploration, it is clear that Thai markets are prosperous for a specific type of firm. Due to Thailand’s liquid market and smaller family-owned businesses, small Private Equity firms are ideal for success. Furthermore, the equity in these deals ranges from 25 to 100 percent, which is explained by the commonality of many businesses looking to sell the entire enterprise.⁸  Government & Economic Context Due to its growing middle class and maturing economy, Thailand has great promise for investment. Southeast Asia is getting attention, and some activity in the region thus far makes the future look prosperous. However, investments are not too familiar in Thailand because Thailand is “an Upper Middle-Income country,” so receiving funding from the Development Financial Institution is difficult. Thailand’s liquid market removes the need for many PE opportunities. However, small firms have an advantage due to the phenomenon of firms and family businesses buying companies that PE firms would typically invest in.⁹ Although, this presents opportunities for PE investors because when Thai companies buy others, PE firms can assist with that transition.  The Thai government is supportive of PE firms and even directly works with firms; the Thai Venture Capital Association, or TVCA, is a firm that works directly with the government and mainly focuses on biotech, utilities, and information tech. While Thailand’s market is not an incredibly strong candidate for all PE endeavors, small firms have an opportunity to enter the market in a typically unconventional way. The Thai government even started PE trusts, which are more flexible ways to invest in PE firms and “alter profit-sharing ratios (particularly for the accrual of carried interest to the GP) and capital contribution arrangements.” These trusts can be used for venture capital and private equity. Furthermore, in 2021, government officials introduced tax incentives for foreign employees and companies to work and invest in Thailand.  Risks & Challenges Political instability is the most prevalent risk when investing in Thailand because regulations on business and general political changes can significantly impact business in Thailand. Since “the political situation in Thailand can be volatile,” foreign investors should pay close attention to laws, tax regulations, and incentives to guarantee following legal procedures. Furthermore, the NAP, or National Action Plan on Business and Human Rights, is in place to prevent human rights violations within businesses. However, some practices are still in violation of human rights.¹⁴ If foreign PE firms invest in Thailand, they should ensure the companies adhere to the NAP. Similar to Vietnam, corruption is an issue that should be monitored. When investing in an already-established Thai business, foreign PE firms must confirm the company complies with the Organic Act on Counter Corruption. Tips for Success  Successful PE firms in Thailand invest in small and medium-sized companies changing management, privatization, or family succession. The equity in these deals ranges from 25 to 100%⁸, which can be explained by the commonality of many businesses just looking to sell the entire enterprise. By partnering with transitioning businesses or buying out a company, a foreign PE firm can establish its presence and learn about the culture of this market.  Foreign investors should not view the Thai government as a regulatory body, but as a partner in their success. The government actively encourages foreign investments, providing support and creating opportunities for success. In particular, the government offers incentives for foreign involvement in key industries such as “automotive, smart electronics, affluent medical & wellness tourism, agriculture and biotechnology, food, robotics, logistics and aviation, biofuels and biochemical, digital, medical services, defence and education development” ¹⁴. By working in tandem with the local government and getting involved in these areas, foreign investors can feel included and part of a team, increasing their chances of success in Thailand.

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The Philippines The Philippines demonstrates excellent investment potential, particularly in the startup industry. The Filipino government backed these initiatives, including the Philippine Roadmap for Digital Startups in 2015, which has helped the Philippines become a flourishing digital economy. With a growing number of young intellectuals,¹⁵ the Philippines presents an opportunity to invest in the youth, promoting future company success.  Government & Economic Context In recent years, the Philippines has been growing and thriving in the presence of private equity. In 2021, “the Philippines emerged as the fastest-growing digital economy among ASEAN member-states.”¹⁵ There is a flourishing market for startups in the Philippines because the government has created an environment conducive to foreign PE firms.¹⁵ The main hurdle to success in this market is the lack of people with knowledge of “high-growth” markets.¹⁵ Some young professionals gain work experience abroad and then return to the Philippines, coined “sea turtles,” have been bringing in great expertise, but this is not an option for all young professionals.¹⁵ With a large educated youth population, there is great potential in the Philippines; foreign firms can capitalize on this while positively impacting Filipino society by using PE investments to turn eager professionals into experts. The Philippines is home to “manufacturing of electronics and technology components for overseas firms” and has excellent natural resources, making it a prime candidate for foreign investment. The Filipino government is aware of this opportunity for economic growth and has thus increased incentives for foreign investments. The Public Services Act made foreign investing more accessible in the Philippines, allowing foreign entities to have 100% ownership of industries related to Filipino public services. With greater government support, it is becoming easier for foreign PE firms to enter the Filipino market.  Risks & Challenges The Filipino government is strongly encouraging foreign investments, making the climate as least risky as possible. Similar to Vietnam and Thailand, there is a presence of corruption in the Philippines – but the government has been working with the UN in recent years to combat corruption. While few laws directly prohibit corruption to rely on, the Anti-Graft and Corrupt Practices Act targets bribery and some corrupt practices. Furthermore, “primary registration or license to do business of a Philippine corporation or a foreign corporation doing business in the Philippines may be revoked if it is shown that such corporation committed serious violations of Philippine law.” Combating corruption in the Philippines will be a challenge for foreign investors because the legal framework is not expansive; however, if they thoroughly understand the Anti-Graft and Corrupt Practices Act, their practice should not be in violation.  Tips for Success  With proper adherence to local bribery laws, focus on specific markets and emphasis on training the youth; PE firms can succeed in the Philippines despite still being in the early stages of welcoming foreign investment. The risk of investing in the Philippines is predominantly corruption; however, working with local firms to follow anti-corruption procedures from the UN would be advised. Coaching small companies and startups in the early phases, training young intellectuals to be equipped to run companies in the future, and bringing in capital at later stages should set firms up for success when entering Filipino markets. As mentioned, the Philippines has many young adults equipped to help companies succeed with professional guidance. If foreign PE firms use their resources to train local employees, they will contribute to the economic success and prosperity of the Philippines. Lastly, technology companies and farming initiatives are the biggest markets for PE investments in the Philippines currently, and there is a high chance of success in this market for foreign PE firms.

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Conclusion Vietnam, Thailand, and the Philippines present diverse and promising opportunities for private equity investments, each with its unique landscape and set of challenges. Vietnam's established presence in the PE market is bolstered by government initiatives and international partnerships, making it a relatively stable choice for investors. Thailand, with its liquid market and supportive government policies, offers untapped potential, particularly for small PE firms willing to navigate its political landscape. The Philippines, while the riskiest due to its nascent market and corruption challenges, is rapidly evolving into a digital economy with significant opportunities in technology and agriculture. However, investors must remain vigilant about geopolitical risks, including the influence of China's economic strategies and regional tensions, which can impact these markets. Understanding the local economic and political contexts, as well as leveraging government incentives, will be crucial for investors seeking to maximize returns while mitigating risks. By adopting a strategic approach and fostering local partnerships, private equity firms can unlock the potential of Southeast Asia's dynamic markets and contribute to their economic growth.

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Lily Raaka is a graduate student at Stanford University’s Graduate School of Engineering pursuing a Master’s in Management Science and Engineering. She received a B.S. in Mathematics with a minor in East Asian Studies, China sub plan, from Stanford University. This summer, she is working as Plocamium Holdings Global Insights Research Lead, exploring the healthcare, health technology, defense technology, national security technology, packaging, and containers sectors and opportunities in Southeast Asia.