Global funds find promise in Southeast Asia infrastructure deals

People stand on a bridge near the Bund, following the coronavirus disease (COVID-19) outbreak, in Shanghai, China, September 6, 2022. (Reuters/Aly Song/File Photo)

 Buyout firms and asset managers are moving in on billions of dollars of infrastructure assets across Southeast Asia, lured by the sector’s growth prospects and stable, long-term returns, bankers and analysts say.

Merger and acquisition deal volume is up in the sector so far this year, data shows, and a healthy pipeline of deals could make Southeast Asia a rare bright spot for global funds as they grapple with rising finance costs and slumping markets.

The industry is also flush with potentially available assets, after a boom in infrastructure development fed by rapid economic growth.

Telecom operators including PLDT TEL.PS in the Philippines and Indonesian carriers, grappling with tight margins and burdensome debt, have done sale and lease back transactions for thousands of cell phone towers.

“Southeast Asia is a highly sought-after market given the compelling growth outlook for infrastructure assets,” said Ee-Ching Tay, head of investment banking for Southeast Asia at Barclays.

About 210 deals targeting Southeast Asia’s industrial and telecoms sector have been announced so far this year, exceeding the 184 from the same period a year earlier, Refinitiv data shows, in contrast with a 9% drop across all sectors in the region, although deal value in the sector has declined.

Last year was a record for the sector, with some blockbuster deals, and analysts say the near-term pipeline is strong.

Possibilities include the data center business of Malaysia’s Time Dotcom Bhd TCOM.KL, which has attracted bids from DigitalBridge Group DBRG.N and U.S. data center firm Equinix EQIX.O and could be valued at about $600 million, sources familiar with the matter said.

The sources declined to be named because the discussions were confidential.

DigitalBridge declined comment, while Equinix and Time Dotcom did not respond to requests for comment.

In another deal that could be worth up to $3 billion, sources familiar with the matter told Reuters last week that Canadian pension fund and buyout firms are among potential suitors for a toll road business put up for sale by CVC Capital Partners and its Hong Kong-listed partner with assets in Indonesia and China.

“Infrastructure assets are generally underpinned by long-term contracts, providing certainty of cashflows, which allows them to attract debt at high gearing to improve returns to investors,” said Gilles Pascual, who leads EY’s activities in Southeast Asian power & utilities sectors.

The region, with its relatively resilient economic growth, has attracted interest in contrast with other places facing slowdowns and even recession as policymakers battle inflation.

Indonesia, the region’s biggest economy, reported gross domestic product growth of 5.4% in April-June from a year earlier, the fastest in a year, while Vietnam grew 13.7% in the third quarter, its fastest pace in decades.

In contrast, the IMF pegs Asia’s overall economic growth at 4.2 percent this year.

“Favourable structural drivers such as local market reforms and rising urbanization and consumption” have also fostered rapid growth in investment opportunities in recent years, said Michael De Guzman, a managing director at KKR’s infrastructure team.

Analysts warned, at the same time, that regulatory and other risks remained, requiring investors to be discerning.

“Markets with the inability to offer a good pipeline of projects or lack of regulatory and legislative clarity can impede the ability to attract institutional capital,” said Sharad Somani, KPMG’s Asia Pacific head of infrastructure advisory.

There are still, however, plenty of signs that global funds are committed to the sector.

KKR said last month it had raised more than $4 billion for its latest Asia infrastructure fund, topping the $3.8 billion raised for its inaugural Asia Pacific fund, which completed fundraising in 2021 and had been the largest such fund in the region.

A number of big M&A deals have already been sealed in recent months, including record transactions in the Philippines.

In April, Edotco, the wireless tower unit of Malaysia’s Axita AXIA.KL, and EdgePoint Infrastructure agreed to buy thousands of cell towers and related infrastructure from PLDT for 77 billion Philippine pesos ($1.35 billion).

PLDT rival Globe Telecom GLO.PS last month clinched a separate sale and leaseback deal for thousands of its towers with KKR-backed Frontier Towers and U.S. alternative investment firm Stonepeak’s associated investment vehicles.

—Reporting by Anshuman Daga and Yantoultra Ngui; Editing by Sumeet Chatterjee and Edmund Klamann

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