Asia-Pacific remains beacon for private equity, says Ernst & Young report
23 January 2013
News, Asia, Global, Southeast Asia
By Asia Asset Management
While Europe and North America continue to face challenges post-financial crisis, economies in the Asia Pacific are seeing record growth, providing added incentives for private equity players to enter the arena. According to Mergermarket data, 2012 saw 278 deals in the private equity space worth more than US$33 billion. A rising familiarity with the private equity model among governments and potential sellers across the region is also providing encouragement as private equity firms begin to establish a greater foothold in the Asia Pacific.
According to 86% of respondents in the report, private equity in the Asia Pacific will follow an upward trajectory, led by investments into Greater China. The spotlight will also shine brighter on Southeast Asia – with 85% predicting increased deal activity – as economies across the sub-region continue to post high-growth figures and provide promises of higher yields for investors. Already, global private equity firms have taken note, making a dash to set up operations and start making buys across Southeast Asia. As the gateway to the region, Singapore is seeing an uptick in private equity activity with global firms eager to establish their presence in the city-state.
“We are seeing an increasing shift in interest and investment strategy to Southeast Asia by both limited and general partners. There is Singapore with its strategic location, accessibility to the rest of the region, established financial infrastructure and attractive tax regime, and newer markets like Myanmar and Vietnam that have a great need for investment. With its many markets at different stages, Southeast Asia is very exciting for private equity investors,” says Michael Buxton, Asia-Pacific private equity leader at Ernst & Young.
Luke Pais, Singapore and ASEAN M&A leader at Ernst & Young says: “Apart from its strategic positioning as the regional financial centre, Singapore fund structures are looking attractive to international private equity funds. Safeguards for investors and the overall ease of doing business act as additional incentives to operating in the city-state. As a result, Singapore continues to attract new funds and regional investment decision makers.”
“In terms of deal activity, Singapore, Malaysia and Indonesia have been the more active markets over the past two years. While this is likely to continue, we hope to see more activity from Thailand and the Philippines in the coming year. Vietnam continues to present a more challenging environment for private equity.”
Similar to last year’s report, making acquisitions remains atop private equity firms’ priority list, followed by raising new capital and improving the performance of portfolio companies. Buys are expected to be prominent in the energy sector, especially as demand for resources skyrockets globally.
The report also indicates that as private equity activity increases in the region, investors are also becoming more sophisticated. Sector specialisation is becoming more prominent, and value creation strategies are on the rise. These are becoming increasingly important as a means of differentiation for fund sponsors who are facing more competition for capital from limited partners.
Mr. Buxton says: “There is a growing focus on exits and maximising value at exit. To ensure this value creation is executed, we are seeing an increasing use of operating partners to drive strategic and operational improvements in portfolio companies.”
Respondents also expect valuations to continue to rise in 2013, an extension from the previous year. Concurrently, some respondents anticipate that buyers will face an impasse with sellers over valuations, while a majority believes the valuation gap will remain on par with previous years, providing enough space for deals to close. Another factor affecting deal valuation will be competition from strategic investors, specifically in sub-regions like Southeast Asia. Similarly, sovereign wealth funds are also expected to challenge private equity houses for assets.
“Healthy corporate balance sheets, low levels of debt and ready access to capital are positioning corporate buyers in China and Southeast Asia as significant competition to private equity investors in these sub-regions,” says Mr. Buxton.
Exit markets in Asia-Pacific were chilled in the past year. Historical Mergermarket data shows that 2012 saw 96 exits worth $13 billion compared to 2011’s 104 exits worth close to $36 billion. With IPO markets effectively shut, more and more PE investors will look to trade buyers as a more viable exit route.
Mergermarket and Remark launched the Asia-Pacific Private Equity Outlook 2013 in conjunction with Ernst & Young.
Southeast Asia growing in prominence and promise
While private equity investment is expected to increase across the Asia Pacific, Greater China will drive deal activity, according to 70% of respondents for the report.
46% of respondents believe private equity activity in Southeast Asia will expand significantly in 2013.
By sector, buys in energy and retail are expected to attract the most interest, driven by energy needs across the world and growing middle classes in the Asia Pacific, according to 80% and 72% of respondents, respectively.
79% of respondents say strategic competitors and cash-rich corporates will present the largest challenge to acquisitive private equity firms in the next year.
Local funds continue to have an advantage over their global counterparts in both raising capital and making acquisitions due to their deep market penetration and relationships in the Asia Pacific.
Striving to create value, private equity firms are increasingly using internal operating partners to help implement strategic and operational improvements in portfolio companies.
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