Private equity (PE) investors, who flocked to Southeast Asia in the past few years in hopes of riding a growth spurt, find themselves still waiting for a payout, Bain & Company found in its research.
According to the Southeast Asia Private Equity Report 2015, the consultancy said competition was intense in 2014, with many PE funds fighting for a limited pool of attractive targets.
“As private equity matures across the region, value creation and path-to-control mechanisms will be key to helping investors generate superior returns in the long-term,” the firm said in a press statement accompanying findings from its research.
PE funds, or general partners (GPs), nudged investment value to $5.9 billion – just slightly higher than the previous year but still 7 per cent below the five-year average.
Exit count was up slightly, from 26 to 30 last year, but about half were valued at less than $50 million, leading exit value to slide to $4.4 billion – the worst showing since 2006.
“It’s easy to forget that most funds are still finding their footing in Southeast Asia,” Sebastien Lamy, Bain partner and co-author of the report, said.
Further dampening the context was macro uncertainty led by Indonesia’s midyear elections and the coup in Thailand, the firm noted.
As a result, performance varied market-by-market, and the region as a whole delivered timid results.
“They are only now starting to build the kinds of networks that are essential to finding targets against the backdrop of rapidly developing economies,” Lamy added.
Though competition, high pricing and political challenges clouded last year’s PE activity in Southeast Asia, there are several indicators that signal a positive environment in the years ahead.
Among them is the indisputable macro fundamentals, as Southeast Asia’s economy is expected to grow from the 7th to the 4th largest economy by 2030, boosted by strong population growth and a rising middle class.
GDP growth is also forecast to improve in most of the markets, especially Indonesia, where the new regime is sending positive signals to the business community.
Additionally, Bain expects a healthy supply of opportunities for PE capital, given that its survey of 145 senior Asia-Pacific PE executives found that 30 per cent of Southeast Asia GPs believe local companies have a good understanding of, and are more open to the PE value proposition, versus just 5 per cent a year ago.
The research also found anecdotal evidence of more carve-out opportunities as large companies seek to shed Southeast Asian units.
“GPs are increasingly more established in Southeast Asia with deeper networks, which are essential to finding targets and securing deals. They have also adopted a more activist attitude with their portfolio companies, and are seeking further control in minority deal situations.”
In terms of commitment, LPs remain committed to Southeast Asia’s PE market and are confident they can achieve superior returns in the region, the consultancy said.
Bain’s survey reveals that 64 percent of GPs expect Southeast Asia will top China as the most attractive market for new deals in 2015.