Private equity (PE) firms in Southeast Asia (SEA) are taking a more selective approach when assessing investments, particularly those in the technology sector, according to the EY Private equity briefing: Southeast Asia (September 2016) report.
The reduction of investments made into the technology sector has brought down the overall value of PE deals completed in 1H16 to $1.56 billion, 17 per cent lower than the same period in 2015. The total number of deals was down by 36 per cent year-on-year.
Joongshik Wang, EY Asean Transactions Leader for Technology, Media and Telecommunications says: “It is clear that the technology sector is now entering into a new phase. Valuations have come off with concerns not just around the sustainability of business models, but more importantly, the exit. We are also seeing increased interest from mainstream PE investors, who are spending more time looking at and understanding the sector before they ‘dip their toes in the water’.”
The quarterly briefing offers a roundup of the PE deals and capital activities across major sectors in the quarter. The report also revealed that PE investors are turning back to fundamental themes and industries that they are familiar with. The consumer products, health care and business services sectors remain active, and the short-term volatility is creating opportunities for investors.
Luke Pais, EY Asean M&A and Private Equity Leader, says: “Liquidity from banks is increasingly scarce for companies, which means they must exit or seek alternative forms of capital in order to strengthen the balance sheet and position for growth.”
Muted volumes in the global marketplace
According to the report, the muted volumes in transactions across SEA reflect what is seen globally. Worldwide, the total value of investments has fallen by 14 per cent year-on-year.
This is in part due to PEs adjusting to a tighter financing market and shows the industry’s continued patience toward investing. As a result, the buy-out dry powder is up 11 per cent from a year ago, to $526.6 billion.
The technology sector remains at the forefront of investor focus but it is clear that there has been a change in market dynamics. In 2016, we have observed that investors take a more tentative approach when assessing investments in this space, which has resulted in an overall decline in activity. It is clear that the sector is now entering into a new phase.
Valuations have come off with concerns around not only the sustainability of business models, but, more importantly, the exit. Alibaba’s acquisition of a controlling stake in Lazada provides one of the region’s first major technology exits and sets a positive precedent for future deals in this space.
The report observes that there is increased interest from the mainstream PE (non-technology specific) investors, with these particular investors spending increased time looking at and understanding the sector as they begin to “dip their toes in the water.”
Overall, PE investors are looking back to fundamental themes and industries that they are familiar with; consumer, healthcare and business services all remain active and the short-term volatility that is being seen in the market is creating opportunities for investors.
This also comes at a time when liquidity from banks is increasingly scarce for companies, translating to how they must exit or seek alternative forms of capital, in order to strengthen the balance sheet and position for growth.
Pais says: “Globally 2015 was a big year for divestments. As such, M&A exit value fell 25% in 1H15 to just over US$120b, as PE firms have a reduced imperative to realize investments and shift their focus from realizations toward deployment.”
Pais notes that the political environment is also impacting the way that PE firms are looking at investments. In particular, he notes that the impending Brexit means that PE firms are working to understand the implications, concluding: “Brexit could present new opportunity for firms that can successfully navigate the new landscape, particularly for US and Asia-based firms that could put dry powder to work if potential target businesses remain uneasy about the ripple effects from the complexity and timing of Brexit.”
Investments, exits & fundraising
The EY report notes that in Q2 2016, a total of $377 million was invested across 25 deals, down on the same period in 2015 when 41deals resulted in US$809m being deployed. Total capital invested of $1.2 billion for the H1 2016 was reported to be consistent with that seen across H1 2015, ($1.4 billion) and H2 2015 ($996 million).
What is more apparent is the fall in the number of deals, which, at 52, is 38 per cent lower than the same period in 2015. The biggest driver behind the decline in deal volume is the decline of investments into into Indonesia, where less than half the number of deals were completed compared to H1 2015, while the other driver was the
slowdown in investments made into the technology sector, with technology investments declining by more than 40 per cent.
The largest deal of the quarter saw Baring Private Equity Asia take a significant minority stake in Telus International, the provider of customer service, information technology, and business process services, for a consideration of $137 million. This was in May 2016 and constituted the largest deal of H1 2016, followed by KKR’ $81.2 million acquisition of Japfa Comfeed indonesia.
Information regarding PE exits in the region is limited due to a number of deals going unreported in the region, leading to them not being captured by the analysis. Exit activity in Q2 2016 was buoyed by the sale of Lazada Group to Alibaba Group Holding Ltd, in a deal valued at $1 billion.
The other deal captured saw 3i Group plc exit from their investment in DenseLight Semiconductors Pte Ltd in a trade sale to US-based POET Technologies
Inc., in an $11.5 million deal. Market sentiment appears to indicate that conditions providing for an exit are improving.
According to the EY report, intelligence suggests that a number of sale processes have recently been launched or are set to be launched across H2 2016, setting the stage for a potential surge in exits through H1 2017.
In terms of fundraising, 2016 has seen the number and size of the funds closed being relatively muted compared to 2015, with four funds being closed in H1 2016, with an aggregate fundraise of $1 billion for the region.
The two largest funds that have been raised have a real estate focus, with the largest being PGIM Real Estate’s closure of an Asia-focused $580 million fund.
In 2015, the data was somewhat skewed by the two record funds raised by Baring Private Equity Asia and RRJ Capital, with both raising in excess of $4 billion, accounting for more than half of the aggregate capital committed for 2015.
A clear slowdown in fundraising activity is apparent and is unsurprising, given the levels of fund-raising across the past 24 months, causing staggering levels of dry powder to build up. For now, the focus is shifting toward investment and the deployment of this capital.