S-E Asia private equity market set for growth but exits challenging

Singapore

SOUTH-EAST Asia's private equity market is poised for growth after Covid-19 hit the region more severely than others, offering plenty of opportunities in deal making, fundraisings and exits.

Private market leaders who attended the AVCJ Southeast Asia Private Markets conference last week agreed that the region is under invested, and are bullish about its long-term future. Where they deferred was in terms of valuations and the tipping point for exits.

Private equity deal value in South-east Asia plummeted more than 50 per cent for the first three quarters of 2020 versus 2019. However, early indications of recovery was seen in the third quarter with more process activity and some exit activity, said Usman Akhtar of Bain & Co.

"The South-east Asia private market should at least double from here," added Conrad Tsang, founder and chairman of Hong Kong-based investment firm Strategic Year Holdings.

Mr Tsang, who spent 13 years at Baring Private Equity Asia before establishing his own firm in 2015, said the focus will be on social and e-commerce as well as fintechs which provide cashless transactions and online education.

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According to his observation, entrepreneurs in the region are watching developments in the US and China, and making reference for their models.

"It is a matter of time before you see similar companies emerging in South-east Asia," Mr Tsang said.

Not wanting to miss out on opportunities in South-east Asia, Kumpulan Wang Persaraan (KWAP) - Malaysia's largest public services pension fund with a total fund size of RM140.8 billion (S$46.4 billion) - has taken "measured positions" in the region, its senior vice-president Saifubahri Hassan said.

Gopal Jain, managing partner and co-founder of Gaja Capital - one of India's leading private equity firms - said India is a US$3 trillion economy, with opportunities worth more than hundreds of billions from displacement and acceleration.

"At US$2,000 per capita, India is where China was in 2005-2008," Mr Jain said. He believes that in 10-15 years, India's software production will begin to show signs of dominance.

"Already, we are seeing companies with domestic domination and they are now seeking global expansion," he said. Late December, Gaja Capital led a US$32 million Series B funding round for the software as service (SaaS) platform LeadSquared. A month earlier, it participated in logistics company Xpressbees's US$100 million Series E fundng.

In terms of sectors, Jim Hildbrandt, managing director at Bain Capital, said the technology sector remains important.

"One of the challenges in tech is there are a lot of players. But tech infrastructure is easier. Infrastructure is required and a better bet," he said, expecting more private sales this year to continue to evolve.

Andrew Thompson, head of deal advisory (Singapore and Indonesia) and head of private equity (Asia-Pacific) at KPMG, said while Covid-19 has resulted in lots of downsizing notably in food and beverage, hotels and resorts as well as travel sectors, many others have grown too.

"There are businesses that didn't skip a beat during the pandemic and are looking better as a model," he said.

Infrastructure, they said, is being redefined by Covid-19, forcing investors to make critical decisions about whether to divert funds from longstanding traditional projects.

Replacing them are infrastructures that provide new and essential services such as dialysis clinics, which have been unscathed by Covid-19 wrath.

"2021 is a year of growth again, especially in Asia," Mr Hildebrandt said.

Liquidity seen today is very different from that during the global financial crisis, he said. Today, there is still evidence of consumer interest, technology has accelerated and the financial sector is doing fine.

"There is a lot of dry powder,'' he said, expecting more exits too, compared to last year which saw eight exits worth some US$3 billion versus 17 worth US$7 billion in 2019.

But Mr Akhtar said it has been increasingly difficult to do exits in the region.

"When you start seeing successful exits like those in the US, that's going to raise the level of excitement for South-east Asia's private equity and venture capital."

"There will be more pressure for exits from 2021," Mr Akhtar said. This is because funds are facing expanding and ageing portfolios. There has been a 20 per cent increase in the regional portfolio of private equity-owned buyout assets since 2015 due to steady investment with fewer exits. Several funds in the region are finding themselves unable to raise more capital without showing strong realised returns in the existing funds, thus prompting a need to get to the next level.

Asia Pacific-wide saw record deal value, excluding real estate and infrastructure, generated in 2020. But exits and fundraising continued to soften, with Greater China, Australia and New Zealand enjoying growth in smaller deals.

In South-east Asia, deal values fell about 30 per cent year on year as many investors exercised caution in the face of the pandemic. Decline in mega deals worth US$1 billion and above has been a clear driver, with the average deal size 20 per cent smaller than that seen in 2019.

The Internet and tech space continued to dominate South-east Asia's landscape by deal count - from 37 per cent in 2016 to 62 per cent in 2018 and 58 per cent in 2020. Fuelling the optimism is South-east Asia which is "birthing more than 300 startups a year, and more than 100 a year with second round funding".

But not all are optimistic. Wai Leng Leong, managing director, head of Asia-Pacific at CDPQ - Canada's second largest retirement fund which manages close to C$340 billion (S$354 billion) - said while South-east Asia has proven more resilient than expected and is looking interesting, the market lacks "depth and breadth".

Ms Leong said valuations in the region are also not cheap because there are so few good buys. The bulk of CDPQ's capital will go to other parts of Asia. "South-east Asia will be more opportunistic and it has to be a very compelling story," she said.

CDPQ invests a third of its fund in public equities, another third in fixed income-like structures and the rest in alternative investments such as infrastructure and real estate.