Creador: Southeast Asia the next growth frontier
28.10.13 / Author: Salini Kumar, The Edge Malaysia
A leading manager of private fund predicts that Southeast Asian markets will be the new growth frontier, ahead of the BRIC (Brazil, Russia, Indian and China) economies.
Brahmal Vasudevan, CEO of Creador Sdn Bhd, believes that the next big opportunities will be in countries such as Indonesia and the Philippines.
“Consumer spending and credit are growing faster in Southeast Asia than in other regions. By comparison, the BRIC economies have issues to deal with,” he tells The Edge.
The BRIC economies have been the major beneficiaries of the flow of funds in the last decade. China, for example, was seen as a major consumer and credited with holding the momentum of global economic growth steady after the US and Europe started struggling in 2008.
But Brahmal says most of the BRIC economies have problems. “China’s growth is slowing down…it no longer records double-digit growth. India’s bull run has ended. Now, the growth stories are Indonesia and the Philippines. In fact, Indonesia is growing at a fast clip and playing catch-up.”
The aeronautical engineer who had this baptism of fire as a fund manager in India says the subcontinent is going through a difficult phase at the moment, both politically and economically.
“The country’s fiscal and current account deficit is huge. If we were to look at making investments there, we would have to factor in things like currency depreciation and look at companies with a rapid growth rate [of around 30% to 35%] to offset that.”
Brahmal first entered the competitive world of private equity in 1999 as general partner and managing director of ChrysCapital in India. The private equity firm had increased its assets under management from US$64 million to US$2 billion by the time he exited the market, after 11 years, around 2005.
In 2011, Brahmal set up Creador, the investment focus of which is primarily Indonesia, Malaysia, Singapore and India. So far, Creador has tended to put money in companies with strong consumer business and brands.
“I avoid cyclical sectors like mining and plantations. I like growth economies or sectors where one can see how theses businesses have operated over a long period of time in other geographies,” explains Brahmal.
Creador also generally looks at companies that are driven by entrepreneurs and prefers to help them grow their business.
“We help to grow medium businesses and leave them in a strategic position for institutional investors to come in,” says Brahmal, citing OldTown Bhd as an example.
Since Creador exited, mutual funds have come into OldTown, the business of which is still growing.
Investors of Creador’s first fund of US$130 million were mainly from outside Malaysia, coming from North America, other Asian countries and Australia. Unlike some private equity firms that need to own 51% of the companies they invest in, Creador prefers to allow the owners to remain in control and continue to build the business.
“We believe one can never displace the passion of an entrepreneur. We are there to provide strategic guidance and support to help business grow – not to get involved in day-to-day operations,” Brahmal explains.
The only time Creador broke this self-imposed rule was in its buyout of Indonesian food outfit PT Simba Indosnack Makmur from India’s Godrej Consumer Products Ltd earlier this year.
“This acquisition demonstrates our commitment to making growth investments in Indonesia and reflects our strong capabilities in both Indonesia and India. PT Simba has a number of leading Indonesian brands in the cereal and snack business with excellent growth prospects,” Brahmal points out.
The US$35 million acquisition is one of the seven companies Creador invested in with money from its now-closed Creador I fund, which raised US$130 million (RM400 million) in total (see table here).
A notable investment is the US$15 million it injected into OldTown in 2012, which turned out to be one of the best performing assets for the fund. Creador exited OldTown after its investment in the company doubled in just 18 months.
The performance of Creador’s other investments has been encouraging as its margin growth has been about 20%. Although the market is undergoing a correction, the internal rate of return for the fund is more than 30% due to the strong growth of its investments.
A rigorous bottom-up approach to investing
Brahmal says Creador employs a rigorous bottom-up approach to investing where its teams are divided by sector. In the first two years of its establishment, it met with 600 companies, but selected only nine to invest in.
Recently, Creador came under the spotlight after it proposed the acquisition of a 20% stake in GHL Systems Bhd through a private placement of new shares. Some of the capital generated from this will go towards funding GHL’s proposed acquisition of Australian Securities Exchange-listed e-pay Asia.
Launched in Malaysia in 1999, e-pay provides electronic top-up services mainly for prepaid mobile users and sells software services. It has a network of retail agents with more than 18,000 points of sale nationwide.
GHL provides end-to-end payment solutions, including electronic data capture (EDC) terminals, contactless readers, network access routers, and online payment gateways. It has operations in Thailand, the Philippines, Australia as well as Malaysia.
Brahmal says the goal is to expand e-pay’s services in Malaysia.
According to Creador’s website, the enlarged GHL and e-pay group will have 60,000 EDC terminals in Malaysia alone.
The GHL transaction for between US$12 million and US$15 million is the second investment made from funds raised by Creador II.
Still in the fundraising stage, Creador II has reportedly closed about 75% of its US$250 million target. The fund is expected to close early next year.
When asked what he considers a good entry valuation, Brahmal says it is different for every company. “It really depends on the company and its prospects. Valuations are also subject to the sector that the company deals with.
“Sometimes, we do see a disconnect between the company’s expectation of its perceived and real value. When that happens, we have to take a step back and determine if that company is going to be a good investment for us.”