Private equity (PE), an asset class not quoted on public exchanges, is a promising financial tool for prospective investors but remains low in Southeast Asia relative to other parts of the world. Despite a downturn last year, PE in the region appears to be on the verge of transition to a new era of value investment.
“Private equity in Southeast Asia in 2014 should outperform the rest of Asia Pacific, a region settling into a multi-year transition, with strong growth fundamentals,” said Suvir Varma, leader of the Asia Pacific private equity practice at Bain & Company.
According to a report by Bain, Southeast Asia has shown great potential for PE. In the report, Mr Varma discusses the anatomy of the 2013 slowdown while suggesting five strategies that detail “where to play” and “how to win” in various countries.
Recent data from Bain show that deal value in Asia Pacific fell last year for a second consecutive year after peaks seen in 2007 and 2011.
The report said most companies that invested during the boom have been facing increased tensions. In addition, the initial public offering (IPO) market has faced more volatility, which results in capital remaining in ageing portfolios longer than expected. As a result, regional economic sluggishness in 2013 curbed PE in Southeast Asia.
However, with its growth potential and strong fundamentals, Southeast Asia has the ingredients for a more robust PE market, especially in light of difficulties facing other Asia-Pacific countries such as China and India.
“The Asia Pacific region struggled to meet its expected double-digit economic growth in 2013 due to currency fluctuation and governance issues, mainly in China and India,” said Mr Varma.
He said there was an ample amount of capital ready to be invested and hungry investors were pushing into Southeast Asia as other Asian private equity markets falter and regroup.
The report finds strong optimism among Southeast Asia’s private equity players. In a survey of PE investors, primarily limited partnerships, Bain found that almost 70% anticipated a significant return on investment, making the region the second most attractive emerging market behind Greater China (China, Taiwan and Hong Kong).
However, given the economic slowdown of recent years, Bain has seen downward pressure on PE investment returns. First, PE deal values plummeted to $45 billion in 2013, about 40% below the 2007 market peak. The decline reflected both IPO market volatility and overvaluation of pricing.
However, Bain reports very strong flows of capital in the first quarter. “Fortunately, 2014 is off to a promising start, with $22 billion in new deal activity that locked the market in at almost half of 2013’s value,” said Mr Varma.
“Their responses demonstrate that the industry has not lost its enthusiasm for the region’s long-term potential, despite the short-term impediments to market activity.”
The private equity outlook for 2014 in Asia Pacific varies by country. For example, two deals were finalised in China that were worth $8.2 billion while PE activity in India is also stirring confidence.
The Indian rupee has started to appreciate and the equity market is thriving, especially since the election of the new BJP government. Thailand, meanwhile, is considered a small market with an uncertain political context, where merger and acquisition activity is driven by cash-rich corporate players.
Bain notes, however, that Southeast Asia has also been a victim of its own success as strong investment flows have spurred competition for deals and valuations.
Even taking into account the distinctions between each Southeast Asian country, Bain has identified a set of five strategies that most successful private equity firms can apply to all investments.
First, a deep proprietary network must be capable of providing crucial market insights to increase the quality of deal flows. Second, there due diligence is essential to develop perceptions of value opportunities and risks. Third, developing a rigorous value-creation plan in the early stage is crucial in guiding the management team to plan and carry out the deal.
Fourth, the PE firm should consider an exit path that continuously tracks options and determines buyers early. Finally, they need to nurture a strong pool of operating managers to help run the portfolio companies.
“Network building for professionals is very essential for executing a firm’s unique value proposition and effectively managing relationships with the limited partners and investors,” suggested Mr Varma.