Asia’s strong consumption growth story has drawn huge investor interest running into billions of dollars worth of commitments waiting to be deployed. Much of the focus of venture capital and private equity firms have been on growth capital – particularly in technology-based businesses.
Yet, even as investor interest remains high, it is going to take a lot more effort than before to generate respectable returns, industry analysts say. For starters, competition for assets in the region has driven up valuations. Furthermore, lines between what were traditionally venture capital, private equity or strategic, corporate investments have blurred.
“If you go back to the last decade, the multiples were much lower. And of course, businesses were smaller. And markets were growing at a very fast pace. The ability to articulate an exit thesis was easier,” Luke Pais, Partner and Head Corporate Finance of EY Singapore told DealStreetAsia. “Today, if you go into any of the regional markets, you find that there are fairly good players of scale, and the ability to move market share is not so easy. So the hurdle is much higher.”
“The days of low valuation and making money through an expansion of multiples are over,” acknowledged Brahmal Vasuvedan, CEO of Southeast Asia-focused PE firm Creador. He added, when Creador started more than six years ago, the firm set up the team to work alongside the companies to address their need to grow the business, even as a minority investor.
A growing market for secondaries
Since entrepreneurs today have broader access to capital, “money is not the only currency. It’s knowledge, your ability to add value to the business is actually necessary,” says Teh Seng Leong, Partner Transaction Advisory Services at EY Singapore.
“There’s a lot of strategic demand for assets,” Pais continues. “Every multinational corporation has a desire to be in Southeast Asia, and they are aggressive buyers. The local conglomerates are aggressive buyers themselves. So the PEs have to be very competitive.”
“The days of 25% IRR are long gone.”
Pais estimates there to be roughly 500 M&As in Southeast Asia a year, valued at between $40 billion and $60 billion. He reckons private equity accounts for about 10% to 15% of those deals.
At the same time, there is a growing market for secondary deals or transactions that take place between private equity firms, particularly as the public capital markets become less enticing as an exit avenue. “If your buyer is a private equity fund, they would also need to find their IRR,” Pais explains. “So you also need to demonstrate that whatever you’re going to do is not going to stop at Year 5 [upon exit], it’s going to continue.”
Funds becoming more specialised
As such, value creation, and not just a single-minded focus on cost-cutting, or the ‘exit’, is a key driver of returns for PE firms, said Nicolas de Geeter, Partner Transaction Advisory Services of EY Singapore in the discussion with DealStreetAsia.
In his view, there is a demand for investors who are able to help businesses with regional expansion, and scalability, as well as to deal with the disruptions that various industries face.
Indeed, as Teh observed, the larger buyout firms, such as KKR & Co, Warburg Pincus, and Baring, have increasingly expanded their operational teams. “They are becoming like the conglomerates of the past,” he explained. “They have hired a lot of senior advisors, people who have a lot of knowledge in the industry, into their funds.”
Consequently, funds are becoming more specialised, Teh added. Even as the broad consumer theme is a common thread running through investment theses, there are firms focused on healthcare, or education, or infrastructure, for instance. “You can see that they’re all trying to deepen their knowledge in the sector because it is getting harder and harder to achieve a 25% IRR just by leaving it alone.”