This article first appeared in The Edge Malaysia Weekly on July 15, 2019 - July 21, 2019

MORE often than not, high-profile deals around the globe involve a private equity firm. This alternative asset class has been around for decades but its rise to prominence in recent times shows that it has become an integral component of the capital market.

In the first half of the year (1H2019), there were 1,494 global private equity buyouts valued at US$245.1 billion (RM1 trillion), according to Mergermarket. In Southeast Asia, there were 16 deals valued at US$1.49 billion. At least two of the deals were in Malaysia.

These figures are in stark contrast to those of the initial public offering (IPO) market. According to EY Global IPO Trends for 2Q2019, the global IPO market raised US$71.9 billion from 507 deals in 1H2019.

It is worth noting that the dry powder available in the global private equity space is staggering. Capital available for deployment stands at US$1.02 trillion, the highest in the last 13 years, according to data from London’s Preqin.

One way of looking at it is that deal flows in the private equity scene have slowed this year while funds have built up. By the same token, one may see it as a huge amount of money that has been shovelled into private equity and sitting ready to be invested in the right deals.

What it can also imply is that private equity no longer plays second fiddle to the stock exchange. In fact, it is becoming increasingly appealing for companies to raise funds via private equity.

Evidence of this is seen in the number of companies that have continuously received large sums of private funding for years without having to hit the public market.

An example close to home is tech company Grab, which started with an e-hailing app but has now expanded into digital payment, micro-lending and food delivery, among others. To date, Grab has managed to secure over US$9 billion in funding from private equity since it was established in 2012.

A regional private equity firm highlights that raising capital from private equity can be very attractive for business owners,

especially those with companies that are in the growth phase, because it allows management to focus on growing the business and not have to deal with the many investor-relation matters associated with public listing, including costs.

OSK-SBI Venture Partners Ltd director Akihiro Yamamoto says company owners in Southeast Asia looking to expand overseas are warming up to private equity firms that have global networks and capabilities. “Some companies prefer to take the private equity route for an overseas expansion rather than take a loan as financial institutions — depending on their risk appetite — may charge higher rates,” he highlights.

A relatively new entity in Malaysia, OSK-SBI Venture is a joint-venture company set up by OSK Ventures International Bhd and Japan’s SBI Holdings Inc to invest in private companies with promising prospects in Asean.

While private equity does provide a less costly method of raising funds for companies, for many, it also represents a way to get deals or agreements done quickly as it avoids the multiple stakeholders involved in public-listed companies.

“With private funding like private equity, things can get done quickly because the company will only be dealing with one party — the private equity investor. Making a deal these days requires the ability to move fast. This can make not being listed and relying on private market funding attractive to companies,” notes one corporate finance adviser.

Private equity delaying IPOs

While some see private equity replacing IPOs, Creador Sdn Bhd founder and CEO Brahmal Vasudevan does not. “I wouldn’t say it’s a substitute for IPOs … instead private equity allows companies to delay the process of [holding] an IPO until they are bigger.

“When you’re that small, nobody will invest in your company because there is no liquidity and it won’t appeal to foreign investors as well. So, what we say to businesses is that we will pay them a fair price, sometimes at or higher than what they can get on the stock exchange. Delay that IPO for three to five years and allow yourselves to grow bigger. So that when you go public, you will have a bigger following of investors in the market,” he explains.

Navis Capital Partners co-founder and managing partner Nicholas Bloy says worldwide, companies are coming into the public markets later in their life cycles as private equity can sustain them more and offer larger rounds of financing.

Notably, it is not just about capital. Brahmal believes the strategic help provided by private equity providers is becoming increasingly important for business owners.

“Money is cheap but what companies are getting is value-added advice. We help them with business development, strategy, product development and entering of new markets.

“When businesses ask why they should take money from us, we tell them it is because we will give them a competitive offer but, more than that, we can offer them help to grow faster in the long term,” he explains.

From the capital market’s point of view, the many methods of funding that can be seen as competitors of the public market is desirable as it shows that the capital market is growing and maturing.

Opportunities abound in Southeast Asia

Interestingly, industry statistics show that the flurry of activities in the global private equity scene has tapered somewhat from the record highs of 2017 and 2018 in terms of count and value but many opine that there are still abundant opportunities for private equity providers to explore, especially in Southeast Asia.

Referring to the EY Global Corporate Divestment 2019 study, OSK-SBI Venture Partners’ Yamamoto says in Southeast Asia, 84% of corporates surveyed have plans to divest their businesses in the next two years. “We believe that private equity firms are increasingly being accepted as an option by these corporates. Among the many reasons are that the operating landscape is significantly more competitive now and company owners have to make the right strategic decisions and take prompt action towards future growth. Some private equity firms have a good capacity to support and accelerate that growth,” he says.

Gerard Teoh, executive director of Crave Capital, which provides consulting services across Southeast Asia, sees plenty of opportunities for investment in family-owned companies. “The opportunities are there in countries like Indonesia, Vietnam and Thailand, where many family-owned companies are in the transition stage. This provides private equity firms the opportunity to add value in circumstances where either the family founder desires to cash out or get ‘outside’ help to bring the business to the next level or is interested in ‘professionalising’ the company to ensure future continuity,” he says.

Teoh believes the transition stage will provide most of the market activity for private equity firms going forward.

However, Navis’ Bloy sees opportunities in consolidating fragmented domestic industries and taking national champions into the Asean region.

If we compare Malaysia with other economies, private equity activity is relatively low, he says, but adds that this will change in the coming years because there will be opportunities for industries to consolidate, leading to larger, more efficient companies.

“We also see opportunities for Malaysian companies to cross the border into other Southeast Asian geographies. This requires capital and expertise, which is what the private equity industry can contribute,” he adds.

Generally, private equity firms tend to lend to businesses with high growth prospects, although each private equity firm may have a different mandate. However, Yamamoto observes that there is an increasing need for a technology component — either an enabler of scalability or a key product differentiator — for sectors to stay on the radar of investors.

“Some of the most attractive companies that we’ve come across that expanded regionally weren’t necessarily pure technology companies but they did have a practical usage of technology ingrained into their corporate DNA,” he highlights.

This observation was affirmed by a private equity firm that says technology and internet deals made up 50% of the deals in Asia-Pacific in 2018. Similar trends were seen in Asean.

Mega IPOs ahead?

As important as investing is for private equity firms, it is the ability to exit and unlock investment values at the end of the day that matters. Exiting can come in many forms, be it through a strategic sale to another company or another private equity firm or even repurchase by the business owners. But the most common mean is an IPO.

In its Capital Markets in 2030 report, PwC notes that private equity has made itself a major source of listing given its investment mandate. The report adds that as the scale of private equity continues to grow, the public market functions as an important exit route for owners, be it on the domestic or leading international exchanges.

The top three biggest private equity exits in 2018 were carried out through IPOs, according to data by Dealogic. They were China’s Haidilao International Holding Ltd (US$12.1 billion), home security company ADT Inc (US$10.5 billion) and Adyen N.V. (US$8.3 billion).

The US$1.2 trillion in dry powder now waiting to be deployed gives the market a glimpse of what the IPO pipeline could look like in the not too distant future.

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