Singapore the only bright spot in Asean private equity market in 2020

SINGAPORE was the only market in South-east Asia to see growth in the number and value of private equity (PE) deals last year, a bright spot amid the dip in investment activity across the South-east Asia region.

PE deal value in the region fell 25 per cent in 2020 to US$9 billion, from US$12 billion the year before, according to a report released by global consultancy firm Bain & Company on Friday. This was the sharpest fall recorded among Asia Pacific countries. The number of deals also fell to 106 from 115 in 2019.

The Bain report attributed the slowdown in investment activity to "unique regional characteristics". There are 11 countries in South-east Asia, and investors would face greater difficulties and challenges in due diligence processes due to border restrictions, noted Alessandro Cannarsi, partner and leader at Bain South-east Asia equity practice, at a virtual conference.

On the other hand, investors in bigger markets such as China and India could possibly still travel within their country, he added.

Another reason for the dip was the "varied Covid impact" and response across different countries in South-east Asia, the report noted. "What we found encouraging though, was that after a sharp downtick in the first and second quarter, deals picked up in the later half of the year.

"US$2.2 billion of deals were struck in the third quarter, while Q4 was particularly strong with US$3.8 billion in invested value," said Mr Cannarsi.

Despite the slight blip, Mr Cannarsi remarked that macro trends in South-east Asia - such as an expanding middle class and a shift online - are still present despite the pandemic.

The Covid pandemic has "only upped the pace of digital change", said the report. It added that consumer habits are evolving rapidly, and require new digital capabilities to meet demands. As such, the Internet and tech industry has long been a shining light for growth in PE in South-east Asia. Internet/tech deals account for 61 per cent of deal volume and value in the region in 2020, said the report. "This is now the leading sector throughout South-east Asia, dominating deals in Indonesia, and leading growth in Vietnam, Singapore, and Malaysia."

In taking a closer analysis, Bain noted that healthcare deals in the tech space are increasingly "reaching scale levels". Digital health services are expected to see continued growth throughout the region in the short to long-term, the report said.

The report also noted that shadow capital is growing in prominence across South-east Asia PE markets. Shadow capital are principal funds allocated by limited partners - such as institutional investors, family offices, sovereign wealth funds and corporate venture arms - into PE assets. It is invested either directly or through co-investments, with the general partner (GP) of a fund.

More than 75 per cent of the 30 highest-funded South-east Asia startups receiving shadow capital investment into their businesses, said the report. It added that shadow capital accounts for more than 60 per cent of all South-east Asia deals by value in 2019.

"Shadow capital investment brings tremendous value to South-east Asia's startups and private companies, allowing for growth similar to that in areas like the internet/tech sector," the report said.

"GPs need to be focused on looking at the long-term now as the shift we are seeing within the industry in South-east Asia will continue," said Suvir Varma, senior adviser for Bain's global private equity practice. "The region offers areas of opportunity now which will continue to see grow and develop over the next three to five years."