Thailand
Sustaining Asean’s investment boom
Venture capital and private equity investment in Southeast Asia have soared to record levels as scores of new investors pour into the region. In 2017, the number of recorded venture capital deals rose to 524, four times the level of 2012, and private equity deal value rose 75% to UScopy5 billion.
Technology companies attracted the bulk of new capital, rising to 40% of the deal count in 2017 from 20% in 2014. Southeast Asia-dedicated funds’ committed but unspent capital has more than doubled since 2012. The region also has produced 10 unicorns — new companies that rapidly achieve market valuations of copy billion or more – including Grab, Go-Jek and Traveloka, with a combined market value of $34 billion.
Can Southeast Asia sustain the momentum? We see the conditions in place for a long-term investment boom. The region’s venture and private equity ecosystems have developed critical mass and are entering a new phase of growth. Our research shows private equity deal value over the next five years is likely to double to $70 billion, producing at least 10 more new unicorns.
But surging investment means increased competition and higher valuations. Investors thus will need to redouble their focus on value creation and organic growth.
STOKING THE BOOM
The number of active investors in Southeast Asia completing private equity transactions with deal values of copy0 million or higher rose to 124 in 2017, a 45% increase from the previous five-year average. The pool of institutional investors, in particular, has expanded significantly. New investors are attracted by the region’s strong macroeconomic fundamentals, the chance to invest in emerging regional champions, and a deepening secondary market for deals of all sizes.
Maturing startups are another powerful investment catalyst. More than 1,300 companies in Asian have received seed financing since 2011, including 261 in 2017 — five times the level of 2011. Increasing demand for capital has dovetailed with rising supply — a signal that company owners are growing more receptive to venture capital and private equity.
Strong exit momentum and healthy returns are also increasing the pace of investment by recycling capital faster. In 2017, exit deal value rose to copy6 billion, up 86% from the previous five-year average. That virtuous cycle helps private equity fund managers feel more confident about raising new funds and putting capital to work.
Deeper integration of the Asean market encourages companies to expand across borders, accelerating their growth. Fullerton Health, for example, now operates more than 500 clinics in eight Asia Pacific countries, after being founded in 2011 with the acquisition of two corporate healthcare providers in Singapore. BookDoc, a three-year- old Malaysian startup with venture funding, connects patients with healthcare providers and has built an online platform spanning five countries.
Strong investor interest in the technology sector and other consumption-based industries is likely to help sustain higher levels of investment. A 2017 study by Temasek and Google forecasts Southeast Asia’s $50-billion internet economy will quadruple by 2025. We expect the tech sector to contribute 20-40% of deal value over the next five years.
Financial technology, in particular, is expanding rapidly. Based on the valuations of leading fintech companies and strong investor interest, we expect two or three fintech unicorns to emerge by 2024. ICT firms are also attracting larger pools of funding. In addition, we see a redoubling of investor interest in health care and education — sectors with significant long-term growth potential, but traditionally fragmented.
NAVIGATING NEW TERRAIN
But competition is increasing and valuations are rising: the average multiple of enterprise value to EBITDA (earnings before interest, tax, depreciation and amortisation) for private equity transactions is 17 times, the highest in a decade. At the same time, uncertainty about global economic growth is rising, and new technologies are accelerating disruption.
To create value in this changing market, investors will need to help portfolio companies achieve stronger growth and performance. In the coming year, some sectors in Southeast Asia will face greater pressure than others. Investors targeting healthcare and medtech, for example, already face intense competition. In our experience, investors who succeed in adding significant value to their companies share a common approach based on four guidelines.
First, they take an Asean perspective and incorporate cross-border expansion into their value-creation plans. Companies that diversify across Southeast Asia grow faster and reduce the risk of reliance on a single economy.
Second, they’ll get the right talent in place from the start. Bain research shows portfolio companies’ leadership is the greatest source of success or failure for value creation — and talent is particularly scarce. But many investors take an overly positive view of management teams early on and delay making changes.
Third, winning investors also build commercial excellence to fuel organic growth. But it’s hard to get right: only 24% of general partners say they’ve met their top-line expectations in most of their portfolio companies over the last few years, according to Bain’s 2018 private equity survey. Leading PE firms build strength in commercial excellence by increasing customer segmentation, upgrading sales force effectiveness, and revisiting pricing or product portfolio strategy.
Finally, they’ll use digital tools to improve portfolio companies’ strategic position, commercial performance and cash flow. Portfolio companies that embrace digital strategies are better positioned to manage disruption and keep pace with rapidly changing markets.
Suvir Varma is a senior adviser with Bain & Company’s Global Private Equity practice, based in Singapore. Alex Boulton is a principal in the firm’s Singapore office. Sharad Apte is a partner and head of the firm’s Bangkok office.
Source: https://www.bangkokpost.com/business/news/1607974/sustaining-aseans-investment-boom