Asean unicorns face re-rating even as PE activity rebounds to a high in 2021

SOUTH-EAST Asian unicorns faced a great “re-rating” in 2021 as they moved into public markets and suffered from the global hit to high-growth tech stocks, even as private equity activity in the region hit a new record over the year, a fresh report by Bain & Co said. 

And the turning tide could see both deal activity and sentiment recede in the near future. “In the short term, there could well be caution exercised by investors, who will aim to ensure they calibrate valuation expectations on private market tech investments to reflect the current environment,” Bain said in releasing its 2021 report on the South-east Asia PE market on Tuesday (May 10).

Investors also cited a “lack of opportunities ‘in play’ amid increased competition from both global and local funds” as a key concern, and are looking to topline growth and operational improvements as return drivers, the report said.

PE activity in South-east Asia rebounded from the lows of 2020 to record growth in deal count, recording 81 per cent year-on-year (y-o-y) growth and leading the Asia-Pacific (Apac) sector. The region was only behind Japan in deal value growth at 143 per cent y-o-y compared to Japan’s 152 per cent.

Against this backdrop, giants such as Sea, Grab, Bukalapak and Goto took to public markets but have since seen their share prices decline.

Growth in PE activity comes after 2020’s significant slowdown as travel restrictions hampered due diligence processes. These restrictions were gradually lifted in the second half of 2021.

Singapore drove the growth of exits in 2021, notably with Grab’s US$4.3 billion initial public offering (IPO) in November 2021 accounting for the bulk of the US$8 billion exit value in South-east Asia.

Asia now makes up slightly over a quarter of the global PE market at 25 per cent with US$1.7 trillion in assets under management. Deal value for Apac grew in tandem, reaching US$296 billion from US$198 billion in 2020 and exit value has shot up to S$172 billion from US$83 billion a year prior. South-east Asian deal value hit a record US$25 billion from US$10 billion in 2020, while exit value grew to US$8 billion from US$3 billion in the year before.

However, fundraising for Apac-focused funds has dropped from the highs of US$350 billion in 2017 to US$144 billion in 2021, which is a slight improvement from US$135 billion in 2020. In 2021, South-East Asia saw a 10 per cent increase in growth for fundraising, while China’s recovery in fundraising saw a growth of 14 per cent, but still lower than its peak in 2017.

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The Internet and Technology sectors continue to dominate South-east Asia’s PE deals, accounting for 57 per cent of all PE deals in the region. But that dominance is waning slightly, as both sectors have declined from a high of 66 per cent in 2019.

Looking ahead, growth stage and late-stage startups are not likely to constitute the bulk of investments as it did in 2021. As a region, South-east Asia has not fared as well with exits, with fewer than anticipated happening in 2021.

“In a multi-year view, it is very important for South-east Asia to show exits, not just in IPOs, but also in trade sales and secondaries. Because this market is not just about tech companies and tech giants going public,” said Usman Akhtar, partner and head of Bain & Company’s South-east Asia Private Equity Practice.

The frothy valuations that startups have been enjoying aren’t helping things either, and can impact exit strategies for investors in the region. Not having an obvious natural buyer is also another issue that the tech sector is facing in the region.

“The other thing is that in the tech sector you don’t really have a controlling shareholder to drive the whole process of determining who to sell to. These things do lead to big tech companies and unicorns having a more natural evolution path going public,” said Akhtar.

Investors in South-east Asia, like their regional peers, are concerned over increased competition from both global and local players. The top 2 issues on their minds are finding the right opportunities in South-east Asia, as investors cope with global competition, as well as ongoing Covid-19 uncertainty.

“While PE investors continue to believe they can get strong returns from the region over the next 3-5 years, we also see them putting more emphasis on topline growth and operational improvements as expectations of multiple expansion become relatively muted,” Akhtar added.

The macro tailwinds for South-east Asia have remained intact, but the larger macro environment has not, with inflation a word on many people’s lips now. And supply chain issues still looming large, investors are now more cognisant of the risks of impact to cost structure, making the emphasis on cost improvement and capital efficiencies key to getting the same return.

“If you’re not banking on your multiples going up substantially between your entry and exit, you better try and get some cost out to make up for that lack of multiple expansion in your mind by having more margin to deal with to recoup good value,” noted Akhtar.