My Say: ESG investing and its effect on private equity deal value

This article first appeared in Forum, The Edge Malaysia Weekly, on November 7, 2022 - November 13, 2022.
My Say: ESG investing and its effect on private equity deal value
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Powered by strong economic growth, private equity (PE) investments in Southeast Asia rose to a record US$25 billion in 2021, up 143% from 2020. Malaysia’s deal value jumped eightfold to US$920 million.

The surge in deal-making followed a sharp decline in 2020 amid Covid-19 lockdowns and restrictions. Each country in Southeast Asia set new investment highs last year, and five megadeals accounted for 33% of total deal value.

Internet and tech investments in Southeast Asia made up the largest share of deal value and volume in 2021. Overall, investments in early-stage companies increased fivefold in 2021 and those in growth companies rose 143%. Exit value in Southeast Asia rebounded to US$8 billion, with Singapore making up most of the increase. A sharp rise in IPOs across the region included Singapore’s Grab Holdings (US$4.3 billion) and Straive (US$1 billion).

Asia-Pacific’s pool of fast-growing internet and tech unicorns — start-ups worth US$1 billion or more — rose to 277 by year end, an increase of more than 60% over 2020, according to CB Insights. Asia-Pacific’s share of the global count of unicorns was 54% at the end of 2021. To date, Southeast Asia has produced 50 unicorns, including 28 in Singapore, 12 in Indonesia, five in Vietnam and three in Thailand, according to Tech in Asia.

A key trend amid record deal-making is the accelerating shift to environmental, social and governance (ESG) investing. Like investments in digital technologies a decade ago, sustainability is fundamentally reordering priorities and strategies for businesses of all types. Many fund managers now view ESG criteria as a core consideration in investment decisions. That is a 180-degree shift.

As governments and regulators speed the shift to a sustainable economy — including transparent supply chains and sustainable products and processes — PE funds see an opportunity. Nearly 40% of PE funds in Asia-Pacific have begun embedding ESG considerations into their overall fund strategy for value creation. It is a significant shift and a trend that will accelerate in the coming decade.

At the same time, the increase in ESG regulations across the region has created a significant investor focus on companies with products and services linked to the environment, renewable energies and clean technologies. Investments in clean technology in Asia-Pacific rose 230% in 2021, following a 106% jump in 2020. More than 95% of PE investors plan to increase their focus on ESG-related issues in the coming three to five years, encouraged by investor demand, according to our 2022 Asia-Pacific survey on general partners (GPs).

Research by Bain and the Institutional Limited Partners Association (ILPA) shows LPs’ attitudes and action in 2021 reached a turning point, both globally and in Asia-Pacific. Worldwide, a solid majority of LPs now require their GPs to anchor ESG criteria in fund strategy and value creation plans. Seventy per cent of LPs say their organisations’ investment policies include an ESG approach, and 85% of those have fully or partially implemented an ESG investment policy. In total, ESG considerations affect 76% of PE assets under management.

Momentum is accelerating partly because society is demanding action, but also because LPs increasingly believe that incorporating ESG criteria into a PE fund’s investment strategy improves its performance. In the Bain-ILPA survey, 50% of global LPs said applying ESG criteria to investments boosts valuation premiums. For this group of LPs, leading on sustainability and climate change helps solve pressing global problems while increasing returns.

Global LPs are raising the bar for GPs, including those in Asia-Pacific. Two-thirds of global LPs avoid investing in funds at the bottom of the ESG performance scale, according to the survey. Nearly 50% think it is important to evaluate GPs’ ability to provide ESG-related key performance indicators, and more than 80% of LPs plan to increase ESG demands on GPs in the next three years.

Countries across Asia-Pacific have recently pledged carbon-neutrality targets and begun implementing roadmaps and policies in line with US and EU targets. Moreover, the ESG regulatory landscape in Asia is evolving rapidly, making ESG criteria an increasingly integral factor in investment decisions. Over the past decade, governments throughout the region have implemented strict disclosure regulations for ESG data. Since 2020, for example, Hong Kong has required mandatory climate-risk reporting for all listed companies and pre-IPO ESG disclosures.

Leading investors are using the global momentum to address climate change as an opportunity to shift from a narrow, carbon-only approach towards a more holistic ESG strategy. They are going beyond compliance with regulations and seeking investments that will have a positive environmental or social impact while creating value.

ESG already has begun to significantly shape the PE industry. In the coming decade, the transformation will accelerate. Leaders are taking bold steps now to ensure they are on the front line of change. They are pioneering the way forward, embedding ESG in diligence and portfolio value creation — a path that will improve sustainability and generate financial value.


Kiki Yang is a partner and leader of Bain & Co’s Asia-Pacific Private Equity practice, based in Hong Kong. Tom Kidd is a partner at Bain & Co, based in Singapore.

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