Private equity (PE) is poised to lift mergers and acquisitions (M&A) in Southeast Asia as institutional investors report record cash piles in excess of $500 billion. PE funds acquired $124 billion worth of assets in H1 2017, a 14 per cent year-on-year increase, according to EY.
Funds invested in Southeast Asia rose from $7.6 billion in H1 2016 to $23.5 billion, with PE firms allocating $570 billion in capital to buyout funds. This surpasses the $487 billion recorded in the 2007-2008 period. PE buyouts amounted to just over 25 per cent of deals recorded in 2007, with H1 2017 data indicating this proportion will increase despite heightened deal-making complexity.
Across Southeast Asia, total deal volume was flat in H1 2017, with deal value down by 37 per cent year-over-year. Luke Pais, Partner and Asean M&A Leader at Ernst & Young Corporate Finance Pte Ltd, explains: “Deal volumes in Asean for the first half 2017 are relatively stable, compared with the same period last year. The difference in deal values was due to a few large deals in technology and consumer products sectors that took place in the first half of 2016.”
“For 2017, we expect some large deals in the second half, so the year should hopefully end well for Asean’s M&A performance. More importantly, after a couple of years of volatility, we are seeing a stabilisation in the markets, which means we can expect deal activity to increase over the next 2-3 years. There is a record amount of capital looking to invest into the region.”
In an email exchange with DEALSTREETASIA, Pais dove deeper into the fundamentals, workings and outlook of the M&A deal market in Southeast Asia.
In terms of the transaction thesis, what is driving M&A by foreign players from mature markets like Europe, Japan, the US and Canada for Asian targets?
Companies from mature markets are looking for growth. Emerging Asia is one of the few regions globally where growth exceeds 5 per cent due to a long-term investment theme around the rising middle class. Therefore, this is an enticing region for investors. The last 2-3 years have seen some volatility but strategic investors typically look at a longer-term horizon when evaluating their investment returns.
The performance of CEOs and Boards are being judged by their exposure and success in emerging markets. This is the consumer side of the equation but also impacts areas such as financial services, which are very much driven by consumer demand.
Asia is also a key player in the global manufacturing supply chain. In the last two decades, Asia, especially China, has firmly taken its place as the manufacturing hub for the world. While there could be policy shifts that might impact this in the short-term, fundamental economics ultimately prevail where it makes sense to manufacture goods in the locations that are at the most advantageous part of the cost curve.
Artificial intelligence and robotics will have a significant part to play in how the global manufacturing supply chain is shaped going forward. Asia is also a significant source of various commodities that are needed for consumer and industrial use and this is an area that also drives investment from mature markets.
Lastly, sectors such as infrastructure and real estate attract large quantum of investment as a number of Asian countries strive to develop First World infrastructure.
Looking at the fundamentals that underlie deal flow in ASEAN, what sort of strategy dominates markets like the Philippines, Indonesia and Vietnam?
While each country has its unique characteristics, the fundamental theme that is driving investment and deal flow is the rising middle class. Local companies are looking to consolidate market share and regionalize. International companies are looking to establish presence in the markets. We see consolidation in certain sectors as scale is created either by market forces or by government mandate.
Infrastructure is being built to support long-term economic development. In markets such as Vietnam, we also see increasing privatisation of state-owned enterprises (SOEs) as businesses are divested to the private sector and the government takes on a more regulatory and oversight role. It is an exciting time as there is always activity and value tends to shift from market to market.
Where does Myanmar stand, given that it has only recently really opened up its economy to foreign investment?
Myanmar is classified as an early stage transactions market in Asean and therefore, the deal volumes and values are relatively low. The types of investments we see today are strategic foreign investors getting an early start in the market by acquiring or co-investing with local companies. A number of the large local family run businesses also have great ambitions for the future and are actively seeking out joint venture and investment partners.
There is an early emerging private equity and venture capital market. Foreign investors in Myanmar mainly come from Japan, China, India and Asean countries, although we are also seeing interest from western investors and a number of multinational companies, particularly those in the consumer products space that have already established their presence in the country.
In a Singapore context, what is being looked at by foreign investors based in the city-state?
Singapore is the hub of ASEAN and therefore offers a regional play. One of the big themes here has been the generational transition and this will continue to play out over the next few years. Singapore is a great location to structure and raise debt financing. Thus we see foreign companies acquire or build an active presence in the city state, giving them regional exposure and the ability to organically or inorganically launch themselves across the region.
For Asian companies, it is a great gateway to the rest of the world so we often see overseas acquisitions of Western companies structured through Singapore. The city state is also a key global hub for private equity, hedge funds and family offices and the capital based in Singapore is invested locally and in the region.