EY - Private equity briefing: Southeast Asia – April 2017

A roundup of private equity deals and capital activities in the quarter as well as trends that are shaping investment decisions today

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2016 saw a slow start for private equity (PE) deals but the pace markedly picked up in the second half. More importantly, some large deals were done during the year and we expect this to set the tone for dealmaking in 2017.

The overall value of PE deals completed in 2016 was US$7.8b, up 41% from 2015. The increase in deal value in 2016 was driven by the technology sector, with 3Q16 seeing a staggering US$1.3b being raised by the region’s two ridehailing apps. However, overall deal volumes were down, from 162 deals in 2015 to 123 deals in 2016.

2016: Increased PE activities in technology sector in Indonesia

The technology sector was at the forefront of investor focus in 2016. Though the year started with investors taking a more tentative approach when assessing investments in this space resulting in an overall decline in activity, the second half of 2016 saw healthy investment activity.

Alibaba’s acquisition of a controlling stake in Lazada was one of the region’s first major technology unicorn exits, which set a positive precedent for future deals in this space. We also saw increased interest from the mainstream PE (non-technology specific) investors.

Indonesia’s on-demand motorbike taxi service Go-Jek raised US$550m, led by PE firms KKR & Co. and Warburg Pincus LLC, as it battled competition from other ride-hailing apps such as Grab and Uber. The other named investors in this round include Farallon Capital and Capital Group Private Markets. Next, led by SoftBank Group, GrabTaxi raised US$750m in September and saw investments from undisclosed existing and new shareholders.

The two investments were primarily focused on Indonesia. While Go-Jek is entirely focused on Indonesia at present, Grab has stated that its key goal is to rapidly grow in the Indonesian market. This could see the two companies go head-to-head in a more aggressive manner in the future. The market in Indonesia for ride-hailing applications is estimated at US$15b by Grab, providing significant opportunity. Further, this market looks to increase as diversification into food delivery and logistics continues. What the two investments do show is the fast evolution of the technology sector in Asean. This underlines the region’s vast potential for technology-based business models.

2017: Megadeals may be expected

Market conditions in Southeast Asia remain challenging amid a changing global landscape. Political change in the US and UK, the prospect of increased protectionism, lower consumer confidence, the impact of artificial intelligence and robotics, and a tighter credit environment and increased volatility in the currency markets provide some of the headwinds. The upside is that compared to many of the global economies, Southeast Asia continues to grow at a faster clip.

As a result, businesses need to do things differently. The overall market growth provides a great platform for businesses to achieve their ambitions. They need capital to do this. Entrepreneurs will need to look beyond traditional bank financing and retained earnings to fund their growth aspirations and some of these could include PE, joint ventures or partnerships, carve-outs of non-core businesses and better balance sheet optimization.

Southeast Asian companies are certainly emerging on the regional and global stage and we will see more billion-dollar companies from this region playing in the global landscape. PE has a great role to play in making this happen.