CDH Investments, a private equity firm focusing on both China and Southeast Asia, prides itself on bringing Chinese operating knowhow to Southeast Asian markets.
Chinese companies have been actively seeking growth outside their home market, irrespective of what’s going on in the political sphere, according to Thomas Lanyi, managing partner at CDH, which manages $20 billion worth of assets.
Earlier this year, the firm secured a 1-billion-yuan ($136.7 million) first close for its second fund that targets China’s Internet data centres. Lanyi sees Southeast Asia also yielding opportunities for data centres, including helping Chinese operators and developers diversify their presence in the region.
Other proven business models in China can also be replicated in Southeast Asia, Lanyi told DealStreetAsia in an interview on the sidelines of the recent Vietnam Private Capital Summit.
“We have been using China’s economic evolution as a leading indicator to predict the development of Vietnam and other Southeast Asian countries for a long time,” he said.
Last year, CDH invested in Bach Hoa Xanh, the grocery business of Vietnamese retailer Mobile World—in which CDH used to be a shareholder. The PE firm also exited Vietnamese restaurant group Golden Gate.
Edited excerpts from the interview:
In Vietnam, you invested in retailer Mobile World and then its grocery business Bach Hoa Xanh. Is there a platform approach that you’re taking?
What are the opportunities you look at?
We like to invest in themes such as the conversion of unbranded to branded consumption, traditional to modern retail, and private healthcare and education. This is the overarching logic for what we are looking for.
In the partnership with Mobile World, it is not really about the platform play. We’ve had a long-time relationship with Mobile World; we are happy to work with each other. If you partnered with a business successfully, and ideally, have made a positive return like we had in Mobile World, it’s a great thing to invest in them again. A big challenge for private equity is the time and effort you take to get comfortable with a new group of people every time you get into a new deal.
You have also invested in other sectors in China, such as green infrastructure. How do you see opportunities in Southeast Asia?
While we were focused on the consumer and healthcare industries in the past, over time, we have also spent time on areas like software services, light industrial, hardware tech, semiconductor, electric vehicles, renewables, and the broader digitalisation theme. We have also invested in solar sector-related companies and the data centre space, which continue to present a lot of opportunities for us.
Southeast Asian countries like Malaysia and Singapore have been bringing in a lot of data centre capacity. In this sector as in many others, we have worked with companies from China that are increasingly looking to diversify their presence and set up their international business infrastructure in Southeast Asia.
What’s your take on the opportunity of replicating business models from China in Southeast Asia?
We have been using China’s economic evolution as a leading indicator to predict the development of Vietnam and other Southeast Asian countries for a long time. Not every business model will be perfectly replicable, so the trick is to understand both the similarities and differences between countries including structural, regulatory, or behavioural factors. Getting your timing right is also critical, as entering a space as time-sensitive as private equity prematurely can be costly for investors.
We also use the experience we’ve had in China as a way to assess and educate our partners about business model or industry-specific risks that may lay ahead in their future, to guide them and their teams on how to prepare themselves. China keeps on developing, so some of the business models that did amazingly well 10 years ago are now facing pressures that the less developed companies we are working with in Southeast Asia don’t have on their radar yet.
How do you expect the US tariff measures to impact our markets?
The situation is complex and remains very dynamic, as you know. It is premature to make credible predictions around what the exact direct or indirect impacts for a specific market are going to be. Also, the nature of these measures is so broad, everybody will be affected to some extent—yet, given we still live and operate in a highly integrated and interdependent global economy; the number of possible outcomes for any individual party is almost impossible to predict within a reasonable margin of error at this point. While in the near term, there will be a lot of friction to grapple with, Asia is, over the long term, on the secular uptrend in terms of global influence and competitiveness.
Will the US-China political tensions forge closer ties between China and Southeast Asia, as well as capital flow from China?
Capital coming out of China is not necessarily a function of what’s going on between the US and rest of the world. China’s own growth rates have been slower in the recent past, and entrepreneurs from this market are looking for new ways to expand their businesses. As their domestic market is becoming more difficult or expensive to drive incremental growth, they realise that places like Indonesia, Vietnam, or the Philippines are viable alternatives.
They also recognise their own competitiveness in Southeast Asia. China- developed products and production capabilities or processes are meaningfully superior to most of what’s coming out of developing Southeast Asia. What they are missing, for the time being, is the downstream piece, such as established, proprietary sales and distribution networks—often a key asset in countries as fragmented and unique as the ones making up Southeast Asia. CDH engages in situations that aim at leveraging Chinese operating knowhow for the purpose of capturing Southeast Asian market growth. I would expect more and more direct investment to come from China into Southeast Asia but not so much on the fund flow side.
What is the adjustment investors should make in their portfolio in the context of the current trade policy discussion?
There is no quick fix for existing portfolio companies. If companies in a portfolio are caught between a Chinese supply chain and US exports, in the near term, they would have to come up with a plan to protect their margins as well as competitiveness, assuming that they will at least try to increase prices to pass tariffs on to consumers. In the medium to long term, operators will try and diversify or re-route on both the supply and demand side.
As to new investments, we are not overly export oriented in general and for sometime have tried to minimise dependency on the US market and any kind of political sensitivity. Having said that, there is also an opportunity where Chinese companies seek international investors like us in their cap table to become that “neutral bridge” between them and their politically delicate target market.
Source: CDH Investments
