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.

Singapore Business Review - - CONTENTS -

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.

Out­look

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.

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