Private equity briefing: Southeast Asia – May 2019

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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PE and Venture Capital (VC) investment activity across Southeast Asia delivered a strong performance in 2018 with a total US$14.1b worth of announced deals. Dry powder reached record levels, and 2019 is off to a relatively sedate start with the announcement of deals worth over US$2.2b till February.

In terms of investment activity, PE investment declined in 2018 with 69 announced deals, valued at US$8.9b, compared to 90 announced deals worth US$17.5b2 in 2017. VC investment increased in 2018 with 311 announced deals, valued at US$5.2b1, compared to 230 announced deals worth US$4.1b in 2017.

Exit value for PE declined sharply from US$20.7b in 2017 to US$7.3b4 in 2018 while PE exit count declined from 41 announced exits in 2017 to 32 exits in 2018. As well, VC exits declined steeply from US$1.7b in 2017 to US$0.1b in 2018 while VC exit count declined from 13 announced exits in 2017 to six exits in 2018.

Unicorns based out of Indonesia (Go-Jek, Tokopedia) and Singapore (Grab) dominate the league tables in 2018 with deals of more than US$1b raised as growth capital. Vietnam-based companies, Techcombank (financial services) and Vinhomes JSC (luxury home developer) raised US$0.9b each as pre-IPO funding from sovereign wealth fund (SWF) and leading PE. Vietnam and Indonesia are seeing increasing deal traction with sizeable investments from SWF and bulge bracket PE, including Government of Singapore Investment Corporation, Warburg Pincus LLC, Kohlberg Kravis Roberts & Co. Inc. and Texas Pacific Group Capital, among others.

Markets across Southeast Asia have witnessed a decline in fundraising in 2018. Interestingly, there was disparity in fundraising performance, as funds with strong track record and size were able to exceed their fundraising goals, while newer funds found it harder to raise capital.

Current trends and a peek into 2019

In the year ahead, we will likely be seeing:

  • Tech companies continue to gain significant traction: Strong investor interest in the region's developing technology sector and other consumption-based industries is likely to help sustain higher levels of investment. PE investors will be particularly interested in Southeast Asia’s FinTech players with payments platforms and digital wallets, and health tech players with medical diagnostics capabilities.
  • Maturing investor landscape leading to stiff competition and increased valuation: The growing amount of dry powder, coupled with the greater demand for capital from later stage companies has resulted in the surge of large cap consortium deals. Valuation for PE transactions are at close to its peak and there is an increasing valuation mismatch. EY Global Corporate Divestment Study 2019 indicates that 70% of Southeast Asian (SEA) vendors believe that the valuation gap is more than 20%.
  • Start-ups gaining stability in the region: Start-up and early-stage funding decreased in 2018 in contrast to the rising expansion and growth capital funding. This indicates confidence of PE and VC firms in existing start-ups.
  • Strengthening regulations increasing investor confidence: The focus on stringent anti-corruption laws among SEA corporates has led to an increase in investor confidence in the region. Malaysia has passed the Anti-Corruption Commission (Amendment) Act 2018, while Vietnam, Thailand and Singapore are enhancing efforts to curb private sector bribery and promote integrity, transparency and compliance.
  • Opportunity for PE firms as corporate divestments expected to see a rise: More than ever, divestments are at the core of companies’ growth and transformation strategies. The EY Global Corporate Divestment Study 2019 found that 85% of SEA corporates plan to divest in the next two years. This continues to reflect a significant increase since 2018 from low previous averages – SEA divestment intentions were just at 26% in 2017.
  • Increased focus on active value creation: The focus on active value creation in the portfolio has never been higher. We see PE funds increasingly ramp up their value creation efforts through various operating models. In addition to topics such as revenue management, cost management, supply chain, and working capital. We are also seeing the emergence of digital as an active topic in value creation.

Topics to be discussed in this issue

In this issue, get insights on the fundamental changes that are at play in the diversified industrial sector in their bid to stay relevant in this changing landscape shaped by new technology and changing preferences. In the article, we will also share about how Industry 4.0, powered by a combination of big data, analytics and physical technology would potentially appear and the six big bets that will differentiate the leaders in the diversified industrial sector from their peers:

  • Customer connectivity
  • Supply chain reinvention
  • Talent and culture
  • Digital assimilation
  • Big data and analytics
  • Advances in enterprise

We share our perspective on how the compliance landscape in SEA markets are affecting PE in the region. There is an increasing thrust on strengthening local legislation and guidelines to bring it on par with accepted international laws and conventions. We list out some of the key challenges that PE face in their pre and post-investment phases, as well as the best practices followed by PE around forensics and monitoring.