This article first appeared in The Edge Financial Daily, on May 23, 2016.
KUALA LUMPUR: Private equity (PE) deal value in Southeast Asia (SEA) slid to US$4.2 billion in 2015, which was about one-third of its five-year average and its worst showing since 2004, as deal counts dipped from 59 in 2014 to 43 last year, according to Bain & Company’s Southeast Asia Private Equity Report 2016.
Though the Asia-Pacific (Apac) PE deal market posted a record year “overall” in 2015, PE remained restrained in SEA, with economic uncertainty, rich valuations and high competition keeping investors on the hook as they waited for a payout, said Bain in a statement.
According to its report, this subdued climate is likely to continue.
“As the current economic expansion nears its seven-year anniversary and signs of instability are beginning to appear, investors must weigh future recession risks and focus on adapting for tumultuous times if they want to realise significant returns,” it noted.
In SEA last year, only Singapore and Indonesia bucked the declining trend, leading the region with 29 deals that made up 90% of the total deal value.
Some 30% of deals in SEA last year were in the Internet sector, with the deal count and value about 2.4 times higher than the previous five-year average, said Bain.
“Exit value improved compared to 2014, but at US$6.7 billion, [it] was slightly below the 2010 to 2014 average. A bumpy IPO (initial public offering) market and volatile macro context also hindered exit activity, which was 35% below historical levels, except in Singapore, where activity remained mostly on par with the previous year,” said Bain.
“Investors in SEA spent much of 2015 hoping that it would be the region’s expected break-out year,” said Sebastien Lamy, who leads Bain’s PE practice in SEA.
“While fundamentals of the region remain strong and sellers are increasingly opening up to the PE value proposition, PE funds could not put their capital to work as much as they wanted.”
According to Bain, it will take time before the funds fully benefit from their developing networks, and the market would need to see manageable pricing, sustainable return stories and improved geopolitical conditions before momentum improves.
“Within the region, a number of country-specific challenges made it difficult to conclude deals on the ground. Competition and a small pool of assets plagued investors in Singapore. In Thailand and the Philippines, the uncertain political and economic environment did little to reassure PE funds, whereas in Indonesia, Vietnam and Malaysia, sellers’ price expectations tamped down deal counts,” it noted.
Nevertheless, based on a survey by Bain, PE funds, on the whole, believe sellers are warming up to PE across the region.
It surveyed 125 PE executives in Apac and found that near 38% of respondents believe they have a good or very good understanding of the PE proposition, and about 75% feel that the PE environment is improving.
Looking ahead, however, it will be even more difficult for investors to realise outsized returns as the market matures, volatility increases and the pool of potential targets remains small, it said.
Bain’s survey showed about 70% of respondents expect competition for deals to either increase moderately or significantly.
As a result, prices are on the rise, with an 11.5 times median equity value-earnings before interest, taxes and amortisation multiple of regional merger and acquistion transactions in 2015, compared with 9.6 times the last five-year average, it added.
“PE funds need to be well prepared to survive the inevitable bumps in the road ahead,” said Suvir Varma, who leads Bain’s PE practice in Apac.
“In our experience, leaders in SEA take an activist approach. They adopt [the] mindset of value creators, not acquirers, which means having clear insights, quality due diligence and discipline in pricing assets, all of which are key to mobilising the right value-creation strategy and executing it,” he added.
