In this cover story, The Edge Singapore speaks to founders, venture capitalists and private equity partners to identify the challenges in building Southeast Asian unicorns, Singapore’s role as an entrepreneurial hub and the outlook for dealmakers as macro obstacles remain.
STAGE 3: EXIT
With its populous nations, robust economy and skilled workforce, Southeast Asia has enticed global private equity firms seeking a share of its rapid growth. However, their optimism is waning as the absence of IPOs in the region casts a shadow over their exit prospects.
Based on data by Deloitte, Southeast Asia saw 163 IPOs last year, a 7% increase y-o-y. Total IPO funds raised decreased by 43%, indicating a higher number of small listings in 2022. Although a recovery could be brewing, the statistics are still not spectacular: The first half of the year saw a 16% y-o-y increase in the number of new IPOs in Southeast Asia, mainly on the back of three sizeable IPOs in Indonesia that had each raised more than US$500 million ($672 million) in 1H2023. The region is also recording a major slowdown in deal value, which halved (52%) in 2022 compared to the previous year.
According to data by Bain & Co, exit value, on the other hand, declined by 46% y-o-y, as investors struggled with the re-rating of public market valuations, deteriorating portfolio performance and fewer avenues for exits given the decline in IPOs.
Optimistic
Even though the data points indicate certain challenges, stakeholders remain optimistic about the future of late-stage deal activity in Southeast Asia. They anticipate brighter prospects starting next year, after the current phase of market consolidation. Kerrine Koh, head of Southeast Asia at private equity firm Hamilton Lane, expresses this sentiment: “We believe that 2022 and 2023 are mostly slow years, and the next 12 to 18 months will see relatively fewer deals due to the subdued IPO scene.”
Koh says this will come on the back of market dynamics in Southeast Asia, where IPOs historically account for a large chunk of private equity exits. Globally, players are less reliant on IPOs and would instead look at other exit strategies such as trade, secondary, buyout, and strategic sales. These channels are less developed in the Southeast Asian region, she adds.
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Kerrine Koh, head of Southeast Asia at private equity firm Hamilton Lane. Photo: Hamilton Lane
“I think the silver lining is that we see many more strategic sales as an exit. Global companies and multinational corporations are seeing value emerge. In the past, they considered Southeast Asia as a venue to diversify their supply chain and marketplace. Today, they are conserving capital, looking at different companies, and using it judiciously to build their business. Therefore, I think that as a percentage, channels such as strategic sales exit will increase while IPO-lead exits will decrease,” says Koh.
With offices throughout North America, Europe, Asia Pacific and the Middle East. Hamilton Lane has US$857 billion in assets under management (AUM) and supervision as at March 31. Last year, the firm strengthened its Southeast Asia presence by setting up an office in Singapore, aside from partnering with fintech platforms Stashway and ADDX.
Echoing Koh, BPEA EQT partner and head of Southeast Asia Janice Leow is bullish on Southeast Asia over the long term, expecting a robust outlook supported by tailwinds such as continuous foreign investments, developing infrastructure and a burgeoning middle class.
Leow says: “As a firm, we have not been that reliant on IPOs. Over the past few years, we have continued to make exits through other private equity funds or trade buyers. It is important for us always to have multiple avenues for exits. We are not necessarily thinking of staying longer in our investments. We are fairly lucky because we did our fundraising last year and have already exited many companies, so there is no pressure on us.”
Last January, the firm sold Interplex, a vertically integrated customised technology solutions provider, to private equity funds managed by Blackstone for a total enterprise value of US$1.6 billion. Interplex was privatised from the Singapore Exchange in 2016 by Baring Private Equity Asia (BPEA) when it was still known as Amtek Engineering.
BPEA was acquired by Swedish private equity firm EQT last year in a cash and stock transaction worth EUR6.8 billion ($10 billion) when first announced in March, says Bloomberg. As at September 2022, BPEA had EUR22.1 billion in fee-generating AUM while EQT had EUR77 billion in AUM as at June 2022.
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Private equity growth
In Southeast Asia, the private equity market has had a late start compared to the Western markets. Venture capital and private equity growth notably soared in 2017 when the private equity deal value rose 75% to US$15 billion, breaking out of a decade-long phase of flat growth.
BPEA was one of the few Asia-based private equity funds in the region over a decade ago, Leow says. Most players were local funds focusing on deals in their respective markets at a time before more regional and global players started moving into the scene.
Janice Leow, partner and head of Southeast Asia at BPEA EQT. Photo: BPEA EQT
Unlike more mature markets like Japan, Southeast Asia is relatively young and many companies are still in the growth stages. But that is also what makes private equity in Southeast Asia exciting, says Leow. “There are many tailwinds and growth tends to be higher, so many companies can scale up quickly.”
Regarding the quality of available deals, Leow says the region has seen significant evolution over the years — from mainly manufacturing companies and offshoots of MNCs to having local innovative champions with their intellectual properties.
On their part, start-up founders have become more sophisticated, no longer thinking of private equity firms solely as capital providers. Instead, they see private equity firms as partners and providers of sector expertise to help them grow. On the flip side, investors are no longer putting in passive minority stakes and hoping for the best — they are now increasingly working with founders and management teams to bring best practices and ensure sustainable growth, says Leow.
“There are quality deals if investors are willing to put in the effort. Of course, Southeast Asia is a very fragmented market, which makes it more challenging. This is where the ‘local for local’ approach that we adopt is very important,” she adds.
Agreeing, Koh says that as Southeast Asia is composed of countries at different levels of economic development, expendable income levels and growth rates, there are distinct differences that investors will need to note.
“In more developed markets, the venture-type deal flow focuses more on artificial intelligence and software-as-a-service. In Southeast Asia, it is more focused on consumer tech, fintech and edtech. In a way, it levels the playing field. It will take time for global private equity players to study the underlying market as some of their skills may not apply here,” adds Koh.
Private equity firms prefer Indonesia for its high valuations and large deal sizes while Hamilton Lane favours emerging markets like Vietnam due to their vibrant innovation and entrepreneurship coupled with a low-cost base. Thailand is also gaining interest, particularly in the fintech sector.
Welcoming new entrants
Other firms focus on their niche markets and utilise the expertise and experience of their general partners. For instance, Singapore’s Hafnium Hafaway specialises in speciality chemicals, natural materials, and agricultural and food tech sectors.
Co-founder Francis Tan says the firm was established in 2017 with a clear focus on speciality chemicals and a proposition that investors favour. Upon testing the hypothesis, the firm found that only a few deals fulfil its criteria. Most deals available are MNC carve-outs, which would struggle to survive and thrive independently.
Tan says: “Instead of forcing ourselves to deploy capital, which many of our competitors do, we have resisted it and broadened our focus to include oleochemicals and natural materials, which enabled us to find a niche in the agro-food tech space. Since then, we have deployed about US$20 million in investments. The ecosystem for these sectors in the region is very vibrant currently. As the hype starts to plateau, there is a clear differentiation between the solid players with credible cases and viable business models, and those that fall by the wayside. This is especially true in the alternative protein space.”
Francis Tan, co-founder of Hafnium Hafaway. Photo: Albert Chua/The Edge Singapore
As the market enters the second half of the year, the accumulation of dry powder in the region could continue after it reached a new high last year. According to Bain, the total unspent private equity capital in the larger Asia Pacific grew 20% y-o-y in 2022 to US$676 billion while 56% of general partners surveyed found fundraising “very challenging”.
Despite the challenging fundraising environment, Koh notes a surge of new entrants, particularly in the private credit sector, successfully raising capital and bolstering the overall ecosystem. These private credit providers bridge the financing gap amid a cautious landscape of funders.
Another trend she has identified is the growing role of personal wealth in the private equity realm as an alternative asset class. Although institutional investors have historically been the key growth driver within private equity, there is an increasing interest and demand among high-net-worth and ultra-high-net-worth investors for private equity investments. “Wealth is under-allocated into private equity; we believe it is only around 5% to 10%, and this is an optimistic estimate,” says Koh.
Alternative investments
Wealthy individuals are increasingly drawn to alternative investments seeking new diversification options and better returns amid volatile traditional public equity and debt markets. Based on data by Preqin, alternative investments are expected to grow at more than 11% annually over the next few years, reaching US$23 trillion by 2026, with private equity continuing to be the largest segment.
In Singapore, family offices are becoming dominant in mid-market private equity, says Nicola Yeomans, partner and co-head of private capital at legal firm King & Wood Mallesons (KWM) Singapore. The firm is seeing an increased focus on credit opportunities across all sponsors due to the ability of credit to reduce downside risk.
Family offices with deep connections or execution experience in particular countries across the region are highly sought after, particularly for venture capital deals or to help with mid-market execution, adds KWM Singapore partner Nick Davies. “Clients are coming to us much earlier within a deal to understand how to attract other ecosystem participants into deals, gain introductions to other participants and execute deals to international standards.”
EQT has launched EQT Nexus, its inaugural strategy for individual investors to capture this opportunity. This global portfolio will invest across EQT’s various strategies, encompassing mature buyouts to early-stage investments in different sectors and regions. It will primarily focus on private equity and infrastructure strategies, including co-investments alongside EQT’s funds.
Koh emphasises the efforts of fintech platforms like ADDX and Stashaway in educating investors about private markets. These platforms provide a more accessible and liquid option than private equity, making it easier for new investors to enter the market and gain familiarity with this asset class.
“Of course, we will not immediately see the results in volume, but I think the platforms have done a lot of the hard work in the educational perspective,” she adds.
Read more:
STAGE 1: FOUNDING
Has the region lost its start-up zeal?
STAGE 2: GROWTH
