private equity briefing: southeast asia – april · pdf fileprivate equity briefing: sea...

1Private equity briefing: SEA

Private equitybriefing:Southeast AsiaApril 2017


This quarterly briefing offersyou a roundup of the privateequity deals and capitalactivities across majorsectors in the quarter andtrends that are shapinginvestment decisions today.

It distills the perspectives ofour team of subject-matterprofessionals in the regioninto pertinent insights tokeep you ahead in navigatingthe private equity landscape.


01Outlook

02Investments

03Exits

04Fund-raising

05Sector infocus:FinancialServices

06Ourservices:PE valuecreation

Contents4 6 8 10 12 15


Outlook

2016 saw a slow start for private equity (PE) deals but the pacemarkedly picked up in the second half. More importantly, some largedeals were done during the year and we expect this to set the tone fordealmaking in 2017.

The overall value of PE deals completed in 2016 was US$7.8b, up 41% from 2015. The increase in deal value in 2016was driven by the technology sector, with 3Q16 seeing a staggering US$1.3b being raised by the region’s two ride-hailing apps. However, overall deal volumes were down, from 162 deals in 2015 to 123 deals in 2016.

2016: Increased PE activities in technology sector in Indonesia

The technology sector was at the forefront of investor focus in 2016. Though the year started with investors taking amore tentative approach when assessing investments in this space resulting in an overall decline in activity, thesecond half of 2016 saw healthy investment activity.

Alibaba’s acquisition of a controlling stake in Lazada was one of the region’s first major technology unicorn exits,which set a positive precedent for future deals in this space. We also saw increased interest from the mainstream PE(non-technology specific) investors.

Indonesia’s on-demand motorbike taxi service Go-Jek raised US$550m, led by PE firms KKR & Co. and Warburg PincusLLC, as it battled competition from other ride-hailing apps such as Grab and Uber. The other named investors in thisround include Farallon Capital and Capital Group Private Markets. Next, led by SoftBank Group, GrabTaxi raisedUS$750m in September and saw investments from undisclosed existing and new shareholders.

The two investments were primarily focused on Indonesia. While Go-Jek is entirely focused on Indonesia at present,Grab has stated that its key goal is to rapidly grow in the Indonesian market. This could see the two companies gohead-to-head in a more aggressive manner in the future. The market in Indonesia for ride-hailing applications isestimated at US$15b by Grab, providing significant opportunity. Further, this market looks to increase asdiversification into food delivery and logistics continues. What the two investments do show is the fast evolution of thetechnology sector in Asean. This underlines the region’s vast potential for technology-based business models.

01


2017: Megadeals may be expected

Market conditions in Southeast Asia remain challenging amid a changing globallandscape. Political change in the US and UK, the prospect of increasedprotectionism, lower consumer confidence, the impact of artificial intelligence androbotics, and a tighter credit environment and increased volatility in the currencymarkets provide some of the headwinds. The upside is that compared to many of theglobal economies, Southeast Asia continues to grow at a faster clip.

As a result, businesses need to do things differently. The overall market growthprovides a great platform for businesses to achieve their ambitions. They need capitalto do this. Entrepreneurs will need to look beyond traditional bank financing andretained earnings to fund their growth aspirations and some of these could includePE, joint ventures or partnerships, carve-outs of non-core businesses and betterbalance sheet optimization.

Southeast Asian companies are certainly emerging on the regional and global stageand we will see more billion-dollar companies from this region playing in the globallandscape. PE has a great role to play in making this happen.

“PE is well placed to capture significant opportunities in 2017 as the capital pool ofchoice. Entrepreneurs need good partners and there is no better partner than PEto create long term sustainable value.”

Luke PaisAsean Leader,M&A and Private Equity


Investments02• In 4Q16, we saw US$2.0b being invested across 30

deals, highest since 2Q14.

• In 2016, while there was a decrease in the totalnumber of deals, with 112 deals as opposed to 148deals in 2015, deal value more than doubled toUS$4.9b (compared to US$2.4b in 2015).

• The increase was due to a handful of large cap deals inthe second half the year, namely the sale of EdotcoAsia to Khazanah and Innovation Network Corp ofJapan (US$600m) and the sale of Nirvana Asia to CVCCapital Partners (US$1.0b).

Figure 1: Investment activity

Figure 2: Investment activity excluding large deals

Source: Thomson One, Dealogic and Mergermarket


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Table 1: Top investments in 2016 (annual)

Investmentdate

Company Country Sector Value(US$m)

Acquirer

Feb 16 Quest Global Services Pte.Ltd. Singapore Real Estate 350.0 Advent International Corp, Bain Capital Inc.,

GIC Special Investments Pte. Ltd.

May 16 Telus International, Inc Philippines Other sectors 137.0 Baring Private Equity Asia Ltd

Sep 16 GrabTaxi Holdings Pte Ltd Singapore Technology 750.0 SoftBank Group, undisclosed firms

Aug 16 Go-Jek Indonesia PT Indonesia Technology 550.0KKR & Co LP, Warburg Pincus LLC, CapitalInternational Inc., Farallon CapitalManagement LLC, undisclosed firms

Aug 16 Siloam International HospitalsTbk PT Indonesia Provider Care 165.3 CVC Capital Partners Ltd

Aug 16 Broadway Industrial Group –FPS and FCD Businesses Singapore Diversified Industrial

Products 111.4 Platinum Equity LLC

Oct 16 Nirvana Asia Ltd Malaysia Professional Services 1,052.2 CVC Capital Partners Ltd

Dec 16 edotco Group Sdn Bhd Malaysia Telecommunications 600.0 Innovation Network Corporation of Japan,Khazanah Nasional Bhd

Geophin GeorgePartner,Transaction AdvisoryServices,Ernst & Young Solutions LLP

“While downside risks to economies still exist, there is an overwhelming confidencefrom our clients that conditions are improving.”


83

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Exits• There remains limited disclosure around PE exits in

the region, with a number of deals going unreportedand therefore not captured by the analysis.

• Of those that disclosed, there was a decrease in thetotal deal value of US$2.7b for exits in 2016,compared to US$3.1b in 2015.

• A major driver of the activity in 2016 was theprivatization of Nirvana Asia Ltd by CVC CapitalPartners and the sale of Lazada to Alibaba, whichaccounted for US$1.1b and US$1.0b respectively.

• Singapore generated the largest number of exits,recording involvement in 8 out of 11 exits.

2015 2016

Singapore Malaysia

Thailand Indonesia

Vietnam Philippines

Figure 3: Exits by country

Exits03

Figure 4: Exit activity



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Vikram ChakravartyAsean Managing Partner,Transaction AdvisoryServicesErnst & Young Solutions LLP

Table 2: Top exits in 2016 (annual)

Completiondate Company Country Sector Value

(US$m) Sponsor Type

Undisclosed Lazada Group China Technology 1,000.0 Alibaba Group Holding Ltd TradeSale

Oct 16 Nirvana Asia Ltd Malaysia Funeral Services 1,052.0 CVC Capital Partners LtdTradeSale

“PE exits remain mostly to trade, though we expect to see an increase insecondaries. Good preparation in articulating the value story is well rewarded bythe market.”



Fund-raising04

• In 2016, there was a huge decline in the number offunds closed and the total value of these fundscompared to 2015. A total of eight funds closed(2015: 24) in the year, raising US$2.4b (2015:US$16.5b).

• The largest fund raised during the year was the AsiaProperty Fund (US$630m) raised by PGIM Real Estate.This was higher than any of the funds raised in 2015.

• There was continued interest in real estate funds in2016 although the majority of the funds raised had agrowth focus.

Figure 5: PE fund-raising with Southeast Asia focus

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Table 3: Top funds closed with Southeast Asia focus in 2016 (annual)

Fund name Manager Type Commitments(US$m)

Closed Industry focus

Arch Capital-TRG Asian Partners III ARCH Capital Management Real Estate 355.0 27-Jun-16 Property

Asia Property Fund III PGIM Real Estate Real Estate 630.0 1-Mar-16 Property

CDH Growth Fund III (USD Parallel) CDH Investments Growth 330.0 12-Dec-16

Health, Retail,Consumer Services,Internet,Health care IT

Creador III Creador Management Company Growth 415.0 13-Dec-16 Diversified

Falcon House Partners Indonesia Fund II Falcon House Partners Growth 400.0 22-Nov-16ConsumerProducts,Consumer Services

“We expect to see an uptick in fund raising in 2017 and an accelerated pace ofdeployment.”

Source: Preqin

Purandar RaoSingapore Head, TransactionAdvisory ServicesErnst & Young Solutions LLP


For PE investors, the financial services industry has never quite delivered to the lure of Asia Pacific’s large, youthfulpopulations, rising discretionary spending, and low penetration levels. Deals have been stymied by regulatoryresistance, asset quality, valuation, or governance concerns leading dealmakers to adopt niche strategies.Despite the US$180b of capital available to PE funds, dealmaking in the financial services sector has been subduedwith a total count of 21 completed transactions in 2016.Across Southeast Asia, despite the availability of capital foreign investors, only four deals were completed last year;Oceania and China saw six and five investments respectively. Based on EY analysis and interviews with some of themost active large and mid-sized players, it appears that PE firms are reconsidering their approach.

Sector in focus:Financial services5

PE firms’ increased focus on the financial services sector

Oceania6

China(Mainland)

5SEA

4

Hong Kong4

Others2

Oceania China SEA Hong Kong Others

Figure 7: Deal count by market (2016)Figure 6: Financial services deal volume (buy-side)deals across Asia-Pacific (2011-2016)

2.7 3.5 5.3 4.5

13.5

6.9

1715 15

2022

21

2011 2012 2013 2014 2015 2016

Deal value (USD bn) Number of deals

(Mainland)


• Specialization: more PE firms focus their investmentstrategies on a handful of sub-segments of the financialservices sector, allowing them to create expertise andleverage experiences throughout their portfolio companiesacross geographies. Some examples of specializationinclude investments in peer-to-peer lending or internet-based finance companies in Hong Kong and mainland China;investments in rural banks for micro and small-and-mediumenterprises plays in Philippines and India; and investmentsin consumer finance businesses across Asia-Pacific. Fundmanagers then often further specialize the investmentthesis by focusing on a specific product, channel or othercompetitive edge, such as advanced underwriting skills andtechnologies.

• Operating strategies: investors — and their limited partners— are increasingly wary of buy-and-hold strategies thatdepend on broad macro-economic growth alone; we see PEfirms increasingly taking majority stakes and playingbroader roles in management to create long-term value.This may include strengthening the management team;taking on turnaround opportunities; introducing operationalbest-practices from more advanced markets; as well aslooking at channel development, often with significant focuson digital strategies.

• Distressed assets and portfolios: depressed commodityprices, slowing economic growth, and the threat ofprotectionist policies have caused a doubling of non-performing-loans in Asian banking sector since 2011 tosome US$290b, with some estimates pointing to overUS$1t. Regulators and banks are adopting a range ofstrategies to deal with the issue, including forcingconsolidation and government-run special assetmanagement vehicles. However, we expect to see anincrease in distressed portfolios for sale in the market –from large individual exposures to wholesale portfoliodivestments across consumer and corporate segments.

Figure 8: Deal count by sub-sector(2016)

Key trends observed in the financial services sector

Banking and capital marketsFinTechInsurance (life and non-life)Wealth and asset managementConsumer financeOther financial services (e.g., fund administration)

Figure 9: Sub-sectors for future investment

Source: Based on interviews with and analysis of investments of 19 PE firms across Asia-Pacific by EY

0 2 4 6 8 10 12

Median FS sub-sector focus

2 (out of 8)

12 of 19 PE firms interviewed focus ononly two FS sub-segments with only onefocusing on five.

A few niche sub-segments are gainingincreasing interest: Corporate services(e.g., fund administration), micro andsmall-and-medium enterprise (MSME)lending and non-performing loans(significant interest). These sub-sectorswill require unique and specialized skillsto whet assets, formulate an investmentplan and create post-deal value.

Other financial services MSME FinTech Consumer financeBanking and capital markets Non-performing loansWealth and asset management Insurance


• There will be further investment by PE in consumer finance businesses, as itis a proxy for consumer growth and increase in disposable incomes.

• While the sector remains less regulated than the banking sector and pricingremains very high in many markets, consumer finance businesses have thepotential to fill the gap between the traditional banking and informal lendingmarkets.

• Potential focus markets include Indonesia, Vietnam and Philippines, whichhave large unbanked populations and high domestic consumption growth.

Key financial services sub-sectors in focus

Middle class inAsia-Pacific

Non-performing loanportfolios

Premium CAGR(2010-2015)

Consumerfinance

• Large FinTech conglomerates in SEA are cash-rich, deal-hungry and havestrategic reasons for investing in other FinTech ventures, making thempseudo-competitors to traditional PE firms. Greenfield FinTech start-ups inSEA need these strategic investors to navigate a regulated industry.

• It is not fully clear if global venture capital or PE firms will be attracted bysub-scale businesses albeit with rapid multiple expansion potential, in thelimelight of above-mentioned regional incumbents.

• Key areas of focus include payments, distribution (e.g., in assetmanagement) and regulation, as FinTechs promise quicker or cheaperprocesses and customer access.

• Populist and recessionary economic undertones globally have impactedasset quality across the region, with some estimates pointing to NPLs inexcess of US$1t in Asia’s banking sector. Thus, certain funds, especiallythose with credit-focused investors are building increasingly NPL-specializedteams in Asia-Pacific.

• We expect to see a pick-up in the value and volume of NPL transactionsbroadly across Asia-Pacific, particularly in China, where the 2015 NPL ratioincreased above 2011’s level having dipped in the intervening years and it isyet to be seen whether regulatory measures have sufficient impact inaddressing the issue.

• Some of the largest and most successful conglomerates have globally usedinsurance or reinsurance businesses as the backbone of their portfolio.Given the sub-sector’s core characteristics (e.g., risk-pooling, premium-now-claim-later and stability of float) and SEA’s strong economic anddemographic fundamentals, PE is showing interest.

• Specialized PE firms are set up and are playing an active role in managinginsurance business, optimizing management operations, introducing newproducts such as micro insurance, while looking at digitalization andoptimization of distribution channels.

FinTech

Non-performingloans (NPL)

2020 expected

1.74billion

2009

525million

Largest number of deals valued

>US$1bacross Asia

InsuranceGlobal

1.0%SEA9.0%

China NPL 1.9xbetween 2011 and

2015 (bankinginstitutions)

>US$1t

"This is an exciting time for investing in the financial services sector in Asia. Macrotrends such as fee pressure, rising NPL, technology development, capital needs, andskill gaps are coming together to provide opportunities for PE to create value. Weexpect to see an increasing momentum of financial services deals going forward.“

Stuart LastPartner,Transaction AdvisoryServices, Financial ServicesErnst & Young Solutions LLP


Our services:PE value creation6

• Focus: provide value creationservices across the PE investmentlife cycle

• Dedicated PE experience:dedicated teams comprising formerPE operating partners, seasonedoperating executives andmanagement consultants

• Broad functional knowledge:capabilities in strategy, M&A andall core operating functions;experience in revenueenhancement, cost reduction,human capital andchange management

• Deep sector experience: primaryfocus in oil and gas, consumer,industrial, and health care; ability totap into sub-sector professionals

• Accelerated approach: customizedapproach that is highly responsiveand provides accelerated realizationof benefits

• Global capabilities: dedicatedteams that has extensive cross-border experience with access tomore than 30,000 consultantsoperating in 140 countries withdeep industry and functional know-how

Our capabilities

EY PE value creation (PEVC) teamcomprises experienced professionalsfocused on PE and is supported byour deep sector and functionalprofessionals around the world.

PE value creation team

Privateequityfund

• Performanceimprovement

• Sales forceeffectiveness

• Businessintelligence

• Finance• Human resources• Supply chain• IT transformation• Risk

• Lead advisory• Commercial advisory• Financial diligence• Operational diligence• IT diligence• Carve-out• Integration

• Restructuring• Real estate• Divestiture• Valuation and

business modeling• Operational improvement


EY ContactsService line contactsM&A

Luke [email protected]

+65 6309 8094

Corporate Finance Strategy

Karambir [email protected]

+65 6309 8089

Transaction Support

Seng Leong [email protected]

+62 21 5289 5007

Transaction Tax

Darryl [email protected]

+65 6309 6800

Valuation & Business Modeling

Andre [email protected]

+65 6309 6214

Country contactsIndonesia

David [email protected]

+62 21 5289 5025

Sahala [email protected]

+62 21 5289 5210

Hertanu [email protected]

+62 21 5289 5684

Malaysia

George [email protected]

+60 3 7495 8700

Preman [email protected]

+60 3 7495 7811

Philippines and Guam

Renato [email protected]

+63 2 891 0307

Singapore

Purandar [email protected]

+65 6309 6560

Vikram [email protected]

+65 6309 8809

Thailand

Ratana [email protected]

+66 2 264 0777

Piyanuch [email protected]

+66 2 264 9090

Vietnam

Toan Quoc [email protected]

+84 8 3824 5252

Du Vinh [email protected]

+84 8 3824 5252

Global contactGlobal

Herb W [email protected]

+1 212 773 6202

Sector contactsConsumer Products Financial Services

Geophin [email protected]

+65 6309 8168

Patrick [email protected]

+65 6309 6720

Stuart [email protected]

+65 6309 8012

Health care Infrastructure

Abhay [email protected]

+65 6309 6151

Lynn [email protected]

+65 6309 6688

Oil & Gas Power & Utilities

Sanjeev [email protected]

+65 6309 8688

Gilles [email protected]

+65 6309 6208

Real Estate TMT

Benedict [email protected]

+65 6309 8786

Joongshik [email protected]

+65 6309 8078


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