Private equity deals in S-E Asia fall in H1, notably in tech sector

Singapore

PRIVATE equity (PE) activity in South-east Asia tapered off in the first half of 2016, as investors adopted a more selective approach in assessing investments, particularly in the technology sector, a new EY report shows.

The overall value of PE deals completed in H1 fell 17 per cent year-on- year (y-o-y) to US$1.56 billion, while the total number of deals slipped 36 per cent to 56.

A key driver of the fall in deal count is the slowdown in investment made in the tech sector. That fell more than 40 per cent, said EY.

Joongshik Wang, Asean transactions leader for technology, media and telecommunications at EY, noted that the tech sector is entering a new phase where valuations have "come off", with concerns not just around the sustainability of business models but, more importantly, the exit.

He added that there is increased interest from mainstream PE investors, who are spending more time looking at and understanding the sector before they dip their toes in the water.

Serial entrepreneur and angel investor Darius Cheung, commenting on the region's tech investment slowdown, said: "This was bound to happen temporarily, in every market that saw a rushed capital injection as did South-east Asia in the last two years."

The founder of property search portal 99.co added that this would change with a "first unicorn exit" expected to happen in the next year. (A unicorn is a private company valued at more than US$1 billion.)

On more mainstream PE investors venturing into tech, Mr Cheung labelled it a definite trend. He cited better returns in tech companies, such as Indonesia's Uber-for-motorcycles service Go-Jek, an early investor in which is Singapore-based venture capital firm NSI Ventures. Last month, Go-Jek raised from several investors a US$550 million private equity round, at a reported US$1.2 billion valuation.

Mr Cheung told The Business Times: "The PE guys will be envious."

Going by the EY report, another key driver of the fall in PE deal count in South-east Asia is the fall in investment in Indonesia, where less than half the number of deals were completed in H1 2016 compared to the first half of 2015.

Gina Heng, CEO of private investment group Marvelstone, attributed this to macroeconomic vulnerabilities, regulatory uncertainties, and the unwillingness of family-owned conglomerates to divest their assets. She told BT: "Even if PE firms are holding significant cash reserves, they are finding it difficult to source for reasonably priced deals in the market."

The muted transactions across South-east Asia reflect what is seen globally, where the total value of PE investments fell 14 per cent y-o-y. EY said that this is due in part to PE firms adjusting to a tighter financing market, and shows the industry's continued patience towards investing.

The global buyout dry powder reached a record of US$526.6 billion in H1 2016, up 11 per cent up from H1 2015. And like in South-east Asia, the tech sector received the largest proportion of global PE investment in H1 this year, accounting for 23 per cent of deal value, and a fifth of deal volume.

The EY report also revealed that PE investors are looking back at fundamental themes and industries with which they are familiar. The consumer products, healthcare and business services sectors remain active, and the "short-term volatility is creating opportunities for investors".

Among the largest PE deals in 2016 is Baring Private Equity Asia taking a majority stake in business outsourcing firm Telus International for US$137 million. To boot, Alibaba's US$1 billion acquisition of a controlling stake in Lazada provides one of the region's first major tech exits this year and sets a "positive precedent for future deals in this space".

The EY report, titled PE briefing: South-east Asia, which tracks PE activity and investment trends quarterly, was released on Wednesday.