Companies across Asia Pacific are currently facing an urgent need for portfolio rebalancing, with around 79% of executives expecting to make two or more divestments in the next 18 months, according to Deloitte’s Asia Pacific report published in July.
Increasing scrutiny of their portfolio holdings has become a top priority for Asia Pacific companies as they attempt to capitalise on growth opportunities and divest assets that no longer fit their strategy.
The report surveyed 250 executives across the Asia Pacific region from private and public companies, including Southeast Asia, with the majority having revenues over US$1 billion ($1.34 billion), on their changing strategic goals and the forces driving portfolio reviews.
Other key insights from the report include more corporates assessing their portfolio performance at least twice a year. This year, about 59% of the corporates surveyed are doing so, up from 46% in 2022.
According to Deloitte, five external forces have been identified as drivers for portfolio rebalancing. This includes navigating geopolitical tensions which cause the dislocation of marketplaces, supply chains and trade partners; the rise of investor activism in Asia putting pressure on companies to address underperforming assets and divest non-core businesses; and the increasing role of private equity as an investor and potential partner in asset portfolio optimisation choices.
Additionally, capital efficiency regulation, particularly in Japan, Korea and likely the rest of Asia, has begun to require companies to disclose capital returns below the threshold.
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Lastly, environmental, social and governance (ESG) goals and the road to net zero have been identified as the fifth external force driving executives to undertake deals and divestments to transition to a “green portfolio”.
This comes on the back of the survey’s results which found that 52% of the survey respondents reported that ESG considerations were frequently discussed during their most recent divestiture.
Despite the impact of ESG on individual companies varying widely by sector and their market position, ESG factors have taken on a central role in companies’ strategic decision making, such as shaping the criteria by which they assess their portfolios and rebalancing activities.
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Companies with a clear ESG story are six times more likely to receive a higher-than-expected deal value, according to the report.
With active portfolio management becoming pivotal for how executives and boards are adjusting to these external forces, the report advocates an “active portfolio management mindset”, which is focused on building resilience and transformative growth through capitalising on growth opportunities and synergies when presented.
“Deloitte's report underlines the need for a more dynamic portfolio review process that aligns with businesses’ strategic vision for long-term growth and value creation,” says Deloitte Asia Pacific’s strategy, risk and transactions leader, Ng Jiak See.
The report also found that almost all respondents - or 99% of those surveyed - are currently considering alternative exit strategies alongside conventional divestment with private capital, and private equity compared to a typical outright sale.
With record levels of dry powder, this reflects the demand of private equity buyers towards investment opportunities in Asia Pacific. As such, sellers are feeling the pressure in adapting their approaches to engage potential buyers earlier in the process and opening themselves up to a wider range of deal structures.
Among the business leaders surveyed, 95% have abandoned a sale in the last 12 months due to the rising need for businesses to do more to be divestment-ready.
“In an era of exponential technology and a heightened focus on ESG, active portfolio management will be one of the keys to corporate success,” says David Hill, Deloitte Asia Pacific’s CEO.
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He adds that acquisition and divestments are currently being driven by a desire to accelerate decarbonisation journeys and to acquire advanced technologies, which could bring merger and acquisition to the forefront of the profit goals of companies.
Moving forward, the report’s findings advise businesses to take on five high-impact actions which include adopting an ‘always-on’ mindset for portfolio reviews, dedicating resources and board-level oversight to align assets with the business’s strategic direction; assessing portfolios on their strategic fit, value creation potential and resilience; and maximising value from poor-fitting assets by developing a compelling story and asset track record.
Additionally, the report found that companies should strive to integrate ESG as a central component of portfolio assessment and rebalancing alongside carefully considering tax implications and opportunities in portfolio rebalancing transactions across the Asia Pacific region.
“Companies should therefore stay nimble and ensure that their assets are aligned with their overall strategic direction. If they are not, companies should be willing and able to move quickly to divest or engage with partners who can help them maximise value for shareholders and achieve their strategic objectives,” says Muralidhar M.S.K., Deloitte Southeast Asia’s strategy, risk & transactions regional managing partner.
Within the report, 31% of respondents said that the availability of tax attributes or other tax benefits had played a significant role in them achieving a higher-than-expected valuation in their most recent divestment.
