The challenges and opportunities in Southeast Asia’s private equity sector will unfold differently from market to market, based on each country’s economic development, political stability and overall business environment, Bain & Company said in its latest report.
The consultancy, which had released its Southeast Asia Private Equity 2015 Report last Friday, pointed out that the game has changed for private equity (PE) firms navigating a significantly more challenging region.
While Asia-Pacific PE rebounded strongly in 2014, the industry in Southeast Asia remained flat, with macro uncertainty, rich valuations and high competition, Bain noted.
“As the industry emerges from recent economic volatility, PE firms are striving to realize full value from their portfolios and build sustainable performance, which will go a long way in helping them deliver above-market performance against the backdrop of a winner-take-all environment,” Usman Akhtar, a Bain partner and one of the report’s co-authors, said.
In 2014, Southeast Asian PE markets have undergone challenges that were specific to each country.
Despite heavy competition and a relatively small pool of targets, Singapore posted strong deal activity in 2014, while exits remained timid and partly stymied by flat equity markets. “Looking ahead, the limited number of targets will continue to pose a persistent challenge, but it should not do much to derail the country’s long history of PE deals,” the report said.
Indonesia has high PE potential and has been attracting investors’ attention for an extended period, but deal-making slowed ahead of mid-year elections.
Further, GPs struggled with both steep multiples and crowds of buyers, Bain pointed out.
“A generally pro-business outlook, the successful completion of elections, and the large domestic consumption market will help boost PE activity, but valuation and uncertainty around the pace of economic growth will continue to loom over investors,” the report said of Indonesia’s PE landscape.
Malaysia, being a prominent PE market, experienced lower than historical activity both on the deal and the exit side, possibly due to political concerns and fears of an economic slowdown.
Like in the case of Singapore, flat equity markets crimped the country’s traditionally strong IPO exit channel.
That said, Bain believed that Malaysia will likely remain a key destination for PE firms.
The Philippines has demonstrated more deal activity again this year again, after a very slow ramp-up from 2009 to 2012.
Bain noted that exits in the country remained encouragingly consistent but said the country will need to build deal flow and successful exits to sustain future growth.
Thailand, a small PE market that has traditionally delivered solid M&A activity driven by cash-rich corporates, has worried investors with last year’s military coup. Consequently, PE activity has cooled on all fronts.
“Now that the country is more stable, acquisitions and exits should resume,” Bain foresaw.
For Vietnam, there was interest generated, albeit around small deals. Bain commented that the country’s future outlook will partly depend on macroeconomic growth and ability to address regulatory challenges.
Bain also projected some strategies that GPs should look into.
Head of Bain’s Private Equity Practice in Asia-Pacific Suvir Varma said that improving GDP growth in many of the Southeast Asian economies should provide more certainty to PE funds on the ground, but GPs cannot rely only on macro factors. “Demonstrating true differentiation and an activist approach will be important tools for PE players to succeed and thrive,” he added.
With LPs narrowing their bets to a limited number of winning PE firms, the consultancy believed that now is the time for GPs to reassess their strategies and sharpen their operational performance.
“In that context, adopting an activist approach whenever possible will be critical to delivering long-lasting results,” the firm noted.
As for winning GPs, they are likely focus further on value creation, which will lead to greater differentiation and be essential to generating sustainable returns in the region.
GPs in minority-stake situations will need to push for a path-to-control mechanism, which will enable them to participate more fully in value-creation strategies and decision-making, such as influencing the board or having a say in key hiring decisions, Bain said.