Shifting priorities: Long term effects of Covid-19 on Southeast Asia's Private Equity Market
Over the past year, the Private Equity market in Southeast Asia has seen a seismic shift in focus and the way of doing business as the global COVID-19 pandemic shocked the system worldwide. However, in this market COVID-19 has proved to only up the pace of digital change with consumer habits evolving rapidly and requiring new digital capabilities to meet demands. As a result, Private Equity investors are seeing new investment opportunities within the internet/tech industry, and the wave of technology IPOs/exits currently on the horizon will serve as bellwether for future deals in Southeast Asia. Given the pandemic’s unclear trajectory, uncertainty remains but there are signs of continued growth in this market following some initial signs of recovery at the end of 2020.
These are among the findings from Bain & Company’s 2021 annual Southeast Asia Private Equity Report, released.
Last year was a year of challenges. Southeast Asia’s Private Equity industry saw decreased exit momentum across almost all countries, and the region saw greater decline in deals vs. other APAC markets due to region specific factors. However, the market began to see activity recovery in Q3 and Q4 and deal value recovery from Q3. Median M&A deal multiples in Southeast Asia also increased in 2020 after experiencing a dip in 2019.
The internet/tech industry has long been a shining light for growth in Private Equity in Southeast Asia. COVID-19 further accelerated this trend with internet/tech deals accounting for the majority of deal volume and value (61%) in the region in 2020. This is now the leading sector throughout Southeast Asia, dominating deals in Indonesia, and leading growth in Vietnam, Singapore, and Malaysia. Within this sector, healthcare deals are also reaching scale levels with digital health services expected to see continued growth throughout the region in the short to long-term.
“While there were many challenges in the Private Equity market in 2020, including a decline in the overall investment market, the continued growth that we are seeing into the internet/tech industry is a cause for optimism,” said Usman Akhtar, a partner in Bain & Company’s Private Equity practice, based in Singapore. “We should continue to see investment in this sector and a continued focus on ESG due diligence – two of the major positive outcomes of the current situation in the industry in Southeast Asia.”
Over the past 3-5 years, general partners (GPs) across the region have increased their efforts and focus on sustainability and ESG, a trend that COVID-19 has accelerated and is likely to continue into future. Just five years ago, only 38% of the assets diligenced on average included an ESG due diligence. Today, this number is up 36 points to 74%, a practice that is expected to continue growing.
Also growing in importance in the Southeast Asian Private Equity market is shadow capital investing. Bain is now seeing more than 75% of the 30 highest-funded Southeast Asia startups receiving shadow capital investment into their businesses. Shadow capital also participated in more than 60% of all Southeast Asia deals by value in 2019 and has continued to grow. Shadow capital investment brings tremendous value to Southeast Asia’s startups and private companies, allowing for growth similar to that in areas like the internet/tech sector.
“While the past year has provided entirely unexpected challenges in the Private Equity market in Southeast Asia, we have also seen the growth of exciting new areas of investment and ways of doing business as a result,” said Andrea Campagnoli, a partner in Bain & Company’s Private Equity practice, based in Singapore. “These challenges and changes are likely to remain and have long reaching effects on the industry as a whole. With that in mind, portfolio companies need to make sure that they are adjusting for the long-term now.”
Looking forward, Bain advises portfolio companies to focus on:
• Testing industry and target asset resilience - deep diligence is required more than ever to understand industry-specific drivers and range of COVID-19 related outcomes
• Stepping on portfolio growth accelerator – COVID-19 recovery across SEA will be slower than developed markets, but portfolio winners will need to take proactive action
• Positioning assets for exit – valuations are high and the need to return value to investors remains; potential to consider non-traditional moves (single asset transfers) to monetize investments
“GPs need to be focused on looking at the long-term now as the shift we are seeing within the industry in Southeast Asia will continue moving forward,” explained Suvir Varma, Senior Advisor 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 3-5 years.”
