A tale of two equities
It was the best of times for Singapore’s private equity landscape with an influx of funds funnelled into the market. But it was also the worst of times for private equity firms who grappled with fewer deals to clinch.
When Singapore-headquartered gaming and Internet company SEA, formerly Garena, went public on the New York Stock Exchange and raised nearly US$900M, it drew attention amongst private equity (PE) fund managers and raised interest in possibly finding the next so-called unicorns that could emerge in the fast-growing region. Many funds have been strengthening their position in Singapore, seen as an increasingly accommodative gateway hub to Southeast Asia, where deals are expected to shoot up as firms warm up to the PE fundraising route.
Doris Yee, director of the Singapore Venture Capital & Private Equity Association, noted that there has been robust growth in terms of capital deployed in Southeast Asia. PE transactions in the first nine months of 2017 reached US$8.2B, surpassing the whole of 2016, with investment activity rising most strongly in Singapore, Indonesia, and Vietnam in the past 12 to 18 months. Some notable transactions from the city-state such as SEA, Grab, and ARA Asset Management at transaction values “well above what is commonly found in our region,” she noted.
One of the recent notable deals in the Singapore market is the private bid by way of scheme of arrangement for Global Logistic Properties by a consortium comprising of HOPU, Hillhouse Capital, SMG, which is owned by GLP’S CEO Ming Mei, Bank of China Group Investment, and Vanke, said Bill Jamieson, partner at Colin Ng & Partners LLP. This transaction is poised to be Asia’s largest private equity buyout.
“The transaction values GLP at S$16b and shows the buyout market is alive and well in Singapore, although the trend in buyouts in Asia generally may be down on previous years,” he said.
Jamieson also cited the acquisition of additional shares in e-commerce firm Lazada by Alibaba for close to US$1B to raise its stake in Lazada from 51% to 83%, which he said shows Southeast Asia’s ability to attract attention as a growth market in online services. Singapore should continue to flourish as a nexus for the management of PE deals in the region, especially as the Monetary Authority
PE transactions in the first nine months of 2017 reached US$8.2B, surpassing the whole of 2016, with investment activity rising most strongly in Singapore, Indonesia, and vietnam in the past 12 to 18 months.
of Singapore announced its move towards a lighter touch regime for venture capital fund managers in Singapore, said Jamieson.
Lots of dry powder
Another factor that is driving up deal interest and activity in the region is the large stock of dry powder amongst PE firms, which they are now itching to deploy, said Chunshek
Chan, global head of M&A and Financial Sponsors Research at Dealogic. “PE firms have been sitting on top of billions of dollars of committed but undeployed capital for years, and it seems like this year, everyone has decided that they can’t wait anymore,” he said. “We are seeing a record high amount of capital being deployed into leveraged buyouts (LBOS), even though the number of LBO deals has fallen to a multi-year low.”
Dealogic also noted that 2017 saw the largest LBO deals on record in Singapore. For the first three quarters of
2017, transaction values amounted to US$2.5B for seven big transactions, as compared to 2016’s figures with a total transaction value of US$920M for 11 LBO deals.
Kai-niklas Schneider, managing partner, Singapore at Clifford Chance, said so-called mega funds are exacerbating the dry powder issue in the region. This has led to very strong asset prices, and he expects this to continue. “The PE evolution in Asia shows a solid shift from growth capital towards more buyouts,” he said. “This shift reflects a natural maturing in the market which is pleasing to see, and reflects the trends we’ve seen in Europe.”
Sectors heating up
In terms of which sectors are attracting PE attention, Schneider said healthcare, education, and social infrastructure are key areas to watch. He added that there is a strong technology element in Southeast Asia in general, which complements the trends in China.
Sebastien Lamy, partner at Bain in Singapore, said the technology space has been heating up in the past quarters, helping drive momentum in 2017. Internet and consumerfocused sectors is also driving deal activity, with the two sectors accounting for more than half of Southeast Asia deal volume from 2015 to 2017 year-to-date.
“Local consumer-focused technology champions are amassing significant financial firepower from GPS and LPS alike,” said Lamy, adding that Southeast Asia is looking especially promising due to entrepreneurs becoming increasingly open to PE investors, although there is still a lot of ground to cover in relatively lower penetrated markets like Indonesia.
The focus on technology comes as Asian consumers move toward digital, and an exciting sector that PE funds are eyeing is e-payments, said Ay Wen Lie, deals partner at PWC Singapore. “Technology is increasingly cutting out the need for traditional intermediaries and reaching consumers that were previously difficult to access,” she said. “Investing in these technologies can provide opportunities for PES to create synergies within their existing portfolios or open up new market segments.”
The area of e-payments is attracting particular attention due to its potential to offer more efficient and cheaper solutions than what banks in the region currently offer, potentially enabling them to reach the unbanked populations in Asia. “PES in financial services see this as an opportunity to invest in a profitable business that was previously closed to outsiders. The e-payments technology can also be sold to banks as an add-on or improvement to existing solutions,” said Lie.
“PES that do not traditionally invest in financial services may also be looking at e-payments in order to capture the growing population of digitally-connected consumers. With the great potential for technology to bring value, we expect to see continued interest in this space,” she added.
Ken Cheung, partner at Bird and Bird ATMD, noted that investments in the e-commerce and fintech sectors as well as investments in the internet sector are popular in the region, with the latter accounting for a quarter of Southeast Asia’s total deal value last year. “There has been a continued interest amongst PE firms to invest into technology, in particular fintech and high growth technology startups. This is to take advantage of the surge in technological innovation and, in particular, technologies which are disruptive,” he said.
Other recent notable deals include the privatisation of ARA Asset Management, which valued the firm at US$1.775B, which was led by the founder and group chief executive, who was leading a group of investors.
“The attraction of Southeast Asia is that it continues to grow at a faster rate compared to many other global economies,” he added. “There are enormous opportunities with the region’s rising middle class
particularly in agriculture, consumer products, retail, healthcare, and education.” But even as Southeast Asia is becoming more attractive for PE investment, Cheung also noted the increasingly picky nature of funds as shown in the decrease in the total number of deals in 2017 compared to previous years, with deal value increasing only because of a number of large cap deals. “Although the competition for transactions is rising, the decrease in number of deals also indicates that PE firms are being more selective in their investments,” said Cheung.
After a strong 2017 so far, Luke Pais, Asean private equity leader at EY, said 2018 and 2019 will likely see a higher deal activity given that PE funds in Southeast Asia have a lot of dry powder in its arsenal. The expected deal acceleration will also be driven by other sources of capital such as sovereign funds and family offices, which are increasingly taking a direct investment and co-investment approach. “Historically, PE accounts for about 10% of the overall M&A deal activity in the Southeast Asian region and we expect this to increase,” said Pais. “The value proposition offered by PES is now well understood in Singapore and Southeast Asia. Entrepreneurs and businesses are keen to partner with PES to grow.” He reckoned that Southeast Asia’s entrepreneurs are looking for more than just money, so PE funds are putting focus on demonstrating their industry understanding and ability to add value as they engage in an investment discussion.
Stephen Woods, partner at Norton Rose Fulbright, Singapore, observed that Singapore’s strong environment in developing and growing financial technology (fintech) and other startups has led companies to relocate their headquarters to Singapore. He said that a presence in the city-state enables these firms to be in closer proximity to Singapore-based funds, and hopefully in a better position to attract PE investments. But EY’S Pais warned that there is a rising challenge for PES, and that is to source proprietary deals given the level of competition and dry powder available in the market, which makes valuations more competitive. “The other challenge is how PES gear up their portfolio against technological disruption,” he said. “Given that PES are pragmatic shareholders looking to create accelerated value over a 5-year holding cycle, PES will look at this as more of an opportunity than a challenge. But it is certainly a big game changer.”
Deal #1: Global Logistics Property’s S$16b proposed buyout is poised to be the largest PE deal in 2017.
Deal #2: The acquisition of additional shares in e-commerce firm Lazada by Alibaba was priced at US$1B.