The rise of alternative asset classes, sectors such as healthcare, fintech, and consumer products, and investors’ quest to resume active dealmaking are critical themes in Southeast Asia’s private equity (PE) market, according to Bain & Company’s Southeast Asia Private Equity Report 2024.
While the second and third quarters of 2023 saw growth over the first, Southeast Asia’s PE market experienced a decline consistent with the global slowdown in deal activity.
Overall, deal value in Southeast Asia fell 39% to US$9 billion in 2023 compared to the previous five-year average (2018-2022), and deal volume dropped 24% in the same period. Growth investments continued to dominate the deal flow in the region, with Singapore and Indonesia contributing significantly to the bulk of deals.
Deal activity declined in the first quarter of 2024, with the region’s deal value reverting to the same level as Q1 2023, at US$1.4 billion.
“It has been a challenging year for dealmaking, exits, and fundraising in Southeast Asia. Our industry survey highlights some of the underlying challenges. General partners (GPs) and limited partners (LPs) report concerns about challenging exit conditions, lack of deal opportunities, and an uncertain economic outlook.
“There is significant pent-up demand to deploy capital in Southeast Asia, but to spur exits, investors recognize the need to generate value across cost and topline opportunities,” said Usman Akhtar, head of Bain & Company’s Southeast Asia PE practice, based in Singapore.
Bain & Company’s survey also indicated that Southeast Asia’s investors anticipate facing competition from both local and global PE firms and strategics this year. Learning from recent experiences, they are now more focused on securing attractive entry multiples and clear exit strategies in new deals.
Additionally, these investors see cost improvement and mergers and acquisitions (M&A) as increasingly vital levers to drive returns.
The report highlighted key themes to watch in SEA’s PE market:
- 1. Rise of Alternative Asset Classes: Global infrastructure and private credit fundraising are on the rise. According to a June 2023 survey by Preqin, more LPs plan to invest in private credit and infrastructure funds compared to other alternative asset classes. Since 2021, Bain has observed that PE-focused alternative asset managers have raised significant Asia-Pacific-focused infrastructure and credit funds.
- 2. Healthcare: 2023 was a notable year for healthcare dealmaking, accounting for 24% of SEA deal value due to several large deals in the provider space. The previous high was in 2019 when healthcare deals comprised 22% of SEA deal value.
- 3. Fintech: Despite a broader tech and internet slowdown, fintech and insurtech were key investment trends in SEA in 2023, with funding increasingly focused on scalable players with strong business models. Fintech deal sizes have increased from 2018 to 2023, with total deal value growing at a 12% compound annual growth rate (CAGR).
- 4. Consumer Products: As population, urbanization, and GDP per capita rise in SEA markets, consumption is expected to grow. Consequently, consumer products companies will become a hotspot for PE investors, particularly in:
– Large scale businesses with strong brand health fundamentals but challenged P&Ls requiring performance improvement.
– Large scale and heritage businesses with weak brand health fundamentals but strong underlying P&Ls that can be leveraged for growth.
– Companies with limited core growth potential but opportunities for growth through product, channel, or geographic adjacencies.
– Small scale businesses with early penetration/growth, strong brand health, and healthy P&Ls.
– Improving market positioning or reducing costs through consolidation of multiple sub-scale players.
– Carveouts of established businesses with strong fundamentals but misaligned with the parent company’s direction. - 5. Quest to Re-energize Dealmaking: Dry powder levels across Asia-Pacific, including SEA, remain high. Investors in SEA are less concerned about entry valuations than in previous years and have significant pent-up demand to deploy capital. The PE industry in SEA has substantial growth potential compared to other parts of Asia. To unlock a resurgence in deal activity, proactive steps are required to exit aged assets, improve stock exchange velocity, liquidity, and depth, and demonstrate operational improvements in PE-owned assets.
“SEA PE remains underpenetrated as a percentage of GDP given the size of the target opportunity pool. Moving forward, the industry in SEA needs to address the exit overhang, enhance stock exchange performance, and show visible traction in operational improvements in PE-owned assets,” said Akhtar.
