Private equity briefing: Southeast Asia - June 2016

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 to the year for private equity (PE), with the first quarter of the year leaving off where 2015 finished. Interest levels and dry powder remain high, but PE firms are taking their time to close deals given the overall volatility in the region over the last few months.

The overall value of PE deals completed in 1Q16 at US$852m was 20% lower than 1Q15. More notable is the 43% fall in the total number of deals completed over the same period, principally due to the decrease in early-stage technology deals.

Economic uncertainties remain resulting in investors taking a more cautious approach, and there is a strong focus on concluding deals at the right terms. However, deal pipelines remain quite robust and we expect this to continue through the year.

A competitive environment

Given the long-term growth story of Southeast Asia (SEA), there is competition for opportunities across the region. Of interest is an increase in Chinese capital inflow and after a quieter period, we are seeing Japanese investors become more aggressive.

Western MNCs continue to have a strong desire to build their businesses in SEA as contribution from emerging markets is still an important measurement in CEO performance. Local conglomerates are also active in building their portfolios and in some respects, invest similarly to PE.

With dry powder at high levels and a number of new players, including pension funds and family offices entering the market, PE houses need to innovate and differentiate to invest.

There is more focus on sector specialists as PEs position to add value to businesses. We are seeing PEs taking more innovative approaches such as investing in roll-ups, deployment of funds into tech companies, partnering with family conglomerates to help them unlock capital, and being more creative in deal structuring. PEs have also become more flexible in their ticket sizes with a recognition that the regional deal sizes are very mid-market.

The impact of competition is that deal multiples continue to remain healthy. According to Dealogic, earnings before interest, taxes, depreciation and amortization (EBITDA) multiples being paid are on average around 10 times EBITDA. This is despite the deteriorating credit conditions that are being experienced where PE houses are seeing less appetite from banks to help fund such deals. This means that alternative forms of debt, such as mezzanine and new loan instruments, are seeing an increase in popularity as investors look to structure deals such that performance criteria are met.

The tight credit conditions across SEA mean that businesses increasingly need to turn to alternate forms of capital. This will present excellent investment opportunities for PE through the rest of the year and likely into 2017. In order to capture these opportunities, PEs need to focus their offering to suit the needs of each situation.

Conducive environment for exit

With competition being high and strategic investors showing real appetite in the region, 2016 should be an attractive time for shareholders seeking an exit.

In SEA, it is believed that there will be an increase in the number of PE-backed assets coming to market across the next 12 months, due to a growing portfolio of assets that are coming to the end of their investment life (i.e., the investment took place over 4-5 years ago).

Given time, we expect the emergence of secondary transactions, where one PE house acquires from another. Secondary transactions are commonly seen in markets such as the US and Europe, but remain limited in SEA at present.

Despite the slowing transaction activity that has been observed over the past two quarters, the fundamentals for PE deal activity remains strong. There are huge amounts of dry powder ready to invest and there continues to be new PE houses opening for business in the region. Interest to invest remains high supported by the ongoing stabilization of SEA economies and commodity prices.

We believe that as 2016 progresses, PE deal activity will increase.