This article first appeared in The Edge Malaysia Weekly on May 1, 2023 - May 7, 2023

PRIVATE equity (PE) deals in Southeast Asia slumped last year, coming off their peak in 2021, owing to a volatile macroeconomic landscape which is expected to persist and weigh on dealmaking further this year, experts say.

“The macroeconomic landscape remains volatile, and the uncertainty in the real and financial markets will likely continue to persist for a while. To add, higher inflation and the prospect of weaker [economic] growth are likely to have a strong impact on investment choices and portfolio performance [this] year,” Usman Akhtar, senior partner and head of Southeast Asia PE practice at Bain & Co, tells The Edge.

Nevertheless, Southeast Asia remains an attractive place to deploy capital in the long term. “The market fundamentals are there, and investors will be able to find attractive opportunities. However, competition will be intense for these assets and multiple expansion will no longer be a sustainable return driver. That puts more pressure on investors to create value during their ownership period,” says Suvir Varma, a senior adviser of Bain’s global PE practice.

Last year, PE deal value in Southeast Asia fell 52% to US$13 billion from US$27 billion in 2021, according to Bain data, which takes into account only deals valued at above US$10 million (RM44.6 million) and excludes those in the real estate sector. The number of deals declined by 15% to 176, from 207. (See chart)

While activity in the region was strong throughout the first half of 2022, matching 2021 levels, it fell in the second half.

Singapore and Indonesia remained as the two countries that attracted the bulk of investment capital in 2022, accounting for over 80% of the region’s deal value and deal count. 

“It was a trickier year to get deals done in 2022,” Usman remarks.  

Many conditions contributed to the decline in PE activity in Southeast Asia last year, but macro factors played an important part. 

“Financial markets experienced significant disruption as the year progressed, as we saw increasing concern around rising rates linked to inflation, and the prospects and impacts of slower economic growth, declining consumer confidence, and falling manufacturing output, all amid the backdrop of heightened geopolitical tensions.

“While Southeast Asia reported robust economic growth compared to the rest of Asia-­Pacific, high inflation across the region did give investors caution. In our survey with Southeast Asia [PE practitioners], we noted that investors find exit conditions challenging. Additionally, the lack of deal opportunities and increased competition were also drivers that investors cited as relative concerns,” Usman says.

Nevertheless, Malaysia managed to buck the trend.  According to Usman, PE deal value in the country climbed 17% to US$1.1 billion last year, while the number of deals rose to seven from five.

“We’ve seen a lot of activity and interest in sectors like healthcare, financial services as well as education in Malaysia. In fact, Malaysia is a market where those sectors, particularly healthcare and financial services in 2022 were the same size as the broader internet [and]technology space versus other markets like Indonesia, where internet and technology is the clear leader in the share of deal value and volume,” he says.

Indeed, it was clear that tech continued to be the main sector of investment in Southeast Asia last year. The largest PE deal in the region last year was the acquisition by Blackstone-managed PE funds of Singapore-based customised technology solutions provider Interplex for an enterprise value of US$1.6 billion, in January.

The second largest, in April, was the US$690 million investment by US-based PE fund Smash Capital, venture capital firm Insight Partners and Singapore sovereign-wealth fund GIC to acquire a minority stake in Singapore-based Coda Payments, an independent platform for digital content monetisation.

In Malaysia, the largest deal last year was PE firm CVC Capital Partners’ acquisition of a  68.35% stake in Affin Hwang Asset Management Bhd for RM RM1.54 billion in cash. The deal was completed in late July.

The second largest was the acquisition of IHH Healthcare Bhd’s medical education arm, International Medical University, by a consortium jointly led by TPG’s The Rise Fund and conglomerate Hong Leong Group for a total enterprise value of RM1.34 billion. The deal, announced last June, was completed in March this year.

Navis Capital Partners co-founder and managing partner Datuk Seri Nicholas Bloy is of the belief that PE deal volume and value in Southeast Asia this year will be “about the same” as last year.

“The industry is in a lull as there is too much uncertainty in the air. People want clarity on interest rates, inflation, recession risks in the US and Europe, geopolitics and so on. Malaysia is also in a lull for the same reasons,” he tells The Edge.

Nevertheless, Asia-focused Navis, which manages about US$5 billion in PE capital, continues to invest in Malaysia’s private healthcare space and also in the durian business, he says.

In October 2019, Navis had acquired Malaysian durian exporter Hernan Corp.

“In total, this year ahead we will invest about US$100 million in Malaysia,” Bloy shares.

Venture capital investing is in “a real slump” across the region and that isn’t expected to change soon, he says. “I think Malaysia will see an increase in investments in the export-oriented sectors of the economy, particularly electronics, and also in higher-end retail activities such as premium supermarkets.”

Navis’ biggest exit last year was from Singa­pore-based electronic waste management firm TES, which it sold for US$1 billion to South Korea’s SK Group. Its biggest new investment was in a large snack-food maker in Vietnam, known as Dan-D Foods, for “well above” US$100 million, Bloy says.

Brahmal Vasudevan, founder and CEO of Southeast Asia- and South Asia-focused PE firm Creador, which manages US$2.2 billion in capital, is of the view that the softness in PE markets will likely continue for an extended period of time.

“If you look back, there was an increase in deal activity from 2017, 2018, and that increase happened as interest rates were low, and so there was a lot of capital flowing into both the public and private markets and as a result valuations also went up. However, since January 2022, markets globally have corrected quite sharply and interest rates have gone up, resulting in valuations having come down.

“Overall, sentiment is down and people are much more cautious about investing in private companies, especially in the venture space. So, I’m not sure if [deal count] will come down further this year, but certainly, it’s not going to be up in a while. My sense is that we will see this softness for some extended period, globally and in Southeast Asia. Malaysia cannot escape those trends,” he says.

Brahmal believes that PE investment in the technology sector, buoyant in the past, will falter.

“I think tech will face a harder time. The problem is that most of these tech companies [into which funds poured] did not have a good business model. In the go-go days, people were prepared to fund loss-making companies, paying revenue multiples, believing that these concepts were going to become successful. I think what ended up happening was that the companies raised a lot of money and then were undisciplined in how they built their business and they were losing money for prolonged periods of time. But now, people are putting a lot more emphasis on profitable growth and, hence, I think you will see a downtick in tech investments as well,” he says.

Johan Rozali-Wathooth, founder and CEO of Bintang Capital Partners — a smaller-sized PE firm managing about RM500 million in capital — concurs with Brahmal’s view. “With interest rates rising and capital becoming more expensive, investors aren’t as enthusiastic about funding unprofitable tech endeavours as they were in the past. They are taking a cold hard look at investment opportunities and asking whether these companies can turn a profit. In the absence of cheap capital, there is more urgency on profitability than before.” 

Meanwhile, despite challenging exit conditions for PE companies, Creador has made US$630 million worth of exits since January last year. Notably, in Malaysia, Creador, an early investor in Mr DIY Group (M) Bhd, made a complete exit from the home improvement retailer in late March, placing out its remaining 4.92% equity interest through a private placement exercise, from which it raised RM664 million.

“That just shows, when you have good, profitable businesses and they’re growing, at a reasonable valuation, people are prepared to pay for them. Issues crop up only when PE companies come in at a high valuation, or invest in businesses that are losing money or don’t have a good business model — in those cases, I think exits will be tough and they will struggle,” Vasudevan remarks.

He shares that Creador, which has made US$350 million worth of investments since January 2022, expects to announce a RM200 million investment into a private company that is “broadly in the consumer space” in Malaysia, as early as this week.

“We’re also working on other transactions. The market is there …  I think the expectations are settling down, so there should be some interesting things to look at,” he remarks.

One of its bigger investments at home last year was a 20% stake in Penang-based Custom Food Ingredients, for which it paid RM160 million, he says. 

Meanwhile, Bintang’s Johan notes that PE firms are generally taking a “wait and see” approach amid a challenging dealmaking environment.

“We’ve seen from the last few years that PE firms generally like consumer plays in Southeast Asia, but now, with the more temperate [macro] environment, a lot of the dry powder is sitting with the PEs … they probably want to see how the whole consumer landscape plays out before making any sort of big, aggressive bets in that space,” he says.

Investors are also cautious about changes in the region’s political landscape, he adds. Malaysia saw a change in leadership last year, while Thailand is expected to have a general election on May 14, and Indonesia, next February.

“They would want to see how any potential changes would help shape policy. Malaysia, for example, in the recent national budget, talked about introducing a capital gains tax on the sale of private shares, but hasn’t given details on it yet. I think [PE firms] would probably want to understand more about the implications of that [tax],” Johan says. 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.