Private equity briefing: Southeast Asia – March 2018
A roundup of private equity deals and capital activities in the quarter as well as trends that are shaping investment decisions today
Private equity (PE) and venture capital (VC) investment activity across Southeast Asia delivered a strong performance in 2017 with a total US$5.9b worth of deals completed. Dry powder climbed into record territory and 2018 is already off to a phenomenal start with the completion of deals worth over US$17b in January.
PE and VC investment activity in 2017 was up 20% against prior year, with 101 deals completed, valued at US$5.9b in comparison to 112 deals worth US$4.9b in 2016. Exit value went down from US$7.5b in 2016 to US$4.2b in 2017, though exit count remained active with 29 exits completed in 2017 versus 31 exits in 2016.
The largest deal in 2017 was Macquarie Infrastructure and GIC’s US$1.3b acquisition for a significant minority stake in Energy Development Corp, a leading vertically-integrated geothermal producer in Philippines. Other large deals for 2017 took place in the real estate sector, notably the privatization of ARA Asset Management by Warburg Pincus.
The technology sector is buzzing yet again. Deals completed in the technology sector surged to a record 62 deals out of the total 101 deals completed in 2017. The technology sector will remain a high priority, steering growth in PE and VC investments in the region.
The surge in fundraising for the Asian markets have been a major headline in 2017. The rise in fundraising activity reflects investor’s confidence in the region, which will drive activity in the upcoming quarters. We are already witnessing a strong start to 2018 with the completion of US$5b acquisition of Equis Energy and the US$12b privatization of Global Logistics Properties, which will go down as one of the largest PE buyout deals completed in Asia to date, both which were announced during 2H17.
Trends we are seeing in 2018
- Technology continues to be the value creation lever: PE firms embrace digital technologies as a driver of returns and a differentiator in an increasingly crowded competitive environment. PE firms look to help investees embrace a digital mindset that permeates all aspects of their business.
- Megadeals make a comeback: The combination of enormous amounts of dry powder, the growing trend of co-investing and an increasingly active group of large direct investors is fueling the likelihood of future of deals above US$1b.
- PE firms must be able to articulate their value-add: Increasing competition has driven the need for PE firms to articulate a differentiated source of value-add above and beyond their ability to invest capital. This might include operational expertise; the ability to help firms access new markets or open doors to new customers; access to a firm’s network of relationships; or a vision for the company that aligns with a founder, owner or management team.
- Shadow capital will increase: There is an increasing prevalence of shadow capital as institutional investors, sovereign wealth funds and family offices become savvier and begin to deploy capital directly.
- Private debt will start to gain traction in the region: Today, global private debt for assets under management (AUM) stands at over US$600b, which is about a four-fold increase from where it stood in 2006. While private debt is well established in developed markets, it is at a nascent stage Southeast Asia. We expect this market to start developing in 2018.
- Corporate divestments expecting to see a rise, presenting opportunities for PE firms: More than ever, divestments are at the core of companies’ growth and transformation strategies. The EY Global Corporate Divestment Study 2018 found that 83% of companies in Asia-Pacific plan to divest within the next two years, more than double the number in 2017 (35%) and an extraordinary increase from 15% in 2015.
In this issue, we will share our perspective on value creation in the digital age, which is now a vital aspect to achieving success and transforming traditional businesses into technology enabled competent enterprises. This has become ever more important given the high entry multiples and competitive business environment in the region. We believe this will be a significant lever for PE returns over the next cycle.
According to the World Bank, Philippines is the 10th fastest growing economy in the world, stimulated by rising consumption, sustained remittance inflows, stable investments, improved government spending and accommodative monetary policies. This vibrant economic landscape is expected to translate into increased M&A activities. We will take a closer look at the Philippines, as well as recently announced US Tax Reform that has been described as the most significant tax law changes in the US in over 30 years.