Private equity briefing: Southeast Asia

Transcription

1 Private equity briefing: Southeast Asia June 216 1

2 This quarterly briefing offers you a roundup of the private equity deals and capital activities across major sectors in the quarter and trends that are shaping investment decisions today. It distills the perspectives of our team of subject-matter professionals in the region into pertinent insights to keep you ahead in navigating the private equity landscape. 2

3 1 Outlook 2 Investments 3 Exits 4 Sector in focus: FinTech Contents 5 Our services: PE value creation

4 1 Outlook 216 saw a slow start to the year for private equity (PE), with the first quarter of the year leaving off from where 215 finished. Interest levels and dry powder remain high but PE firms are taking their time to close deals given the overall volatility in the region over the last few months. The overall value of PE deals completed in 1Q16 at US$852m was 2% lower than 1Q15. More notable is the 43% fall in the total number of deals completed over the same period, principally due to the decrease in early-stage technology deals. Economic uncertainties remain resulting in investors taking a more cautious approach and there is a strong focus on concluding deals at the right terms. However, deal pipelines remain quite robust and we expect this to continue through the year. A competitive environment Given the long-term growth story of Southeast Asia (SEA), there is competition for opportunities across the region. Of interest is an increase in Chinese capital inflow and after a quieter period, we are seeing Japanese investors become more aggressive. Western MNCs continue to have a strong desire to build their businesses in SEA as contribution from emerging market is still an important measurement in CEO performance. Local conglomerates are also active in building their portfolios and in some respects invest similarly to PE. With dry powder at high levels and a number of new players, including pension funds and family offices entering the market, PE houses need to innovate and differentiate to invest. There is more focus on sector specialists as PEs position to add value to businesses. We are seeing PEs taking more innovative approaches such as investing roll-ups, deployment funds into tech companies, partnering family conglomerates to help them unlock capital and being more creative in deal structuring. PEs have also become more flexible in their ticket sizes with a recognition that the regional deal sizes are very mid-market. The impact of competition is that deal multiples continue to remain healthy. According to Dealogic, earnings before interest, taxes, depreciation and amortization (EBITDA) multiples being paid are on average around 1 times EBITDA. This is despite the deteriorating credit conditions that are being experienced where PE houses are seeing less appetite from banks to help fund such deals. This means that alternative forms of debt, such as mezzanine and new loan instruments, are seeing an increase in popularity as investors look to structure deals such that performance criteria are met. 4

5 The tight credit conditions across SEA mean that businesses increasingly need to turn to alternate forms of capital. This will present excellent investment opportunities for PE through the rest of the year and likely into 217. In order to capture these opportunities, PEs need to focus their offering to suit the needs of each situation. Conducive environment for exit With competition being high and strategic investors showing real appetite in the region, 216 should be an attractive time for shareholders seeking an exit. In SEA, it is believed that there will be an increase in the number of PE-backed assets coming to market across the next 12 months, due to a growing portfolio of assets that are coming to the end of their investment life (i.e., the investment took place over 4-5 years ago). Given time, we expect the emergence of secondary transactions, where one PE house acquires from another. Secondary transactions are commonly seen in markets such as the US and Europe, but remain limited in SEA at present. Despite the slowing transaction activity that has been observed over the past two quarters, the fundamentals for PE deal activity remains strong. There are huge amounts of dry powder ready to invest and there continues to be new PE houses opening for business in the region. Interest to invest remains high, supported by the ongoing stabilization of SEA economies and commodity prices. We believe that as 216 progresses, PE deal activity will increase. Luke Pais Asean Leader, M&A and Private Equity Deal activity is 1Q16 was lower than expected. We expect deal activity to improve but PEs need to seriously consider their points of differentiation as they engage with businesses. 5

6 2 Investments In 1Q16, a total of US$52m was invested across 24 deals, an increase in investment levels compared against 4Q15, but still considerably lower than previous quarters. Consumer and tech remained the most active sectors, albeit, compared with 1Q15, the number of investments into tech companies fell by 6%, Figure 1: Investment activity accounting for a large proportion of the overall decrease. The largest deal of the quarter saw Advent International, Bain Capital and GIC Special Investments investment to acquire a minority stake in Quest Global Services, the engineering consultancy based in Singapore. Deal value (US$m) 4,4 4, 3,6 3,2 2,8 2,4 2, 1,6 1, Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q Deal count Source: Thomson One, Dealogic and Mergermarket Small Mid Large Deal count Figure 2: Investment activity excluding large deals Deal value (US$m) 1,6 1, Deal count 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Source: Thomson One, Dealogic and Mergermarket Small Mid Deal count 6

7 Table 1: Top investments in 1Q16 Investment date Company Country Sector Value (US$m) Acquirer Feb 16 Quest Global Services Pte. Ltd. Singapore Other sectors 35. Mar 16 Astroscale Pte. Ltd. Singapore Other sectors Mar 16 M-Service JSC Vietnam Banking and capital markets Advent International Corp, Bain Capital Inc., GIC Special Investments Pte. Ltd. Innovation Network Corporation of Japan, Jafco Co. Ltd Goldman Sachs & Co., Standard Chartered Private Equity Ltd. Mar 16 Ching International Service Pte. Ltd. Singapore Consumer products and retail 2. IDG Ventures USA, Vision Knight Capital, undisclosed firm Feb 16 Kfit Asia Sdn. Bhd. Malaysia Technology Startups L.P., Sequoia Capital India, SIG Capital Partners Ltd., Malaysia Venture Capital Management Bhd., Venturra Capital Geophin George Partner, Transaction Advisory Services, Ernst & Young Solutions LLP PE houses are becoming increasingly creative. We have observed a number pursuing buy-and-build strategies in markets that they have identified as being underserved, going about their business in a very targeted and end-goal-driven manner. 7

8 3 Exits Exits There remains limited disclosure around PE exits in the region, with a number of deals going unreported and therefore not captured by the analysis. Exit activity remained low, with two deals being captured in 1Q16. The largest being Warburg Pincus, along with other existing shareholders, sale of a significant minority stake in Quest Global Services for US$35m. The average hold period for PE investments across SEA is longer than what is seen globally. This creates additional risk for PE firms when undertaking investments, since there is an increased likelihood that these investments will incur a change in the business cycle during the holding period. Accordingly, it is expected that there will be an increase in exit activity across the next 12 months. Deal value US$m Figure 3: Exit activity 2,5 2, 1,5 1, 5 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 Small Mid Large Deal count Source: Thomson One, Dealogic and Mergermarket Deal count Purandar Rao Singapore Head, Transaction Advisory Services, Ernst & Young Solutions LLP There is an increase in the number of PE houses looking toward exiting portfolio companies. A lot of market sounding is being done to get a feel for interest levels and pricing before a full process is launched. 8

9 4 Sector in focus: FinTech According to the EY FinTech Adoption Index, one in seven consumers globally are regular users of FinTech. Hong Kong (29.1%) has the highest FinTech use, followed by US (16.5%) and Singapore (14.7%). Payments has the highest rate of adoption, largely due to its integration into e-commerce sites and limited risks for consumers. Moving forward, the increased connectivity through the growing Internet of Things (IoT) will only see more and more cashless transactions taking place. Figure 4: Disruptive activity can be found in a number of hot spots across the financial services landscape Deposits and lending Investments Insurance Payments Enterprise In use Peer-to-peer (P2P) lending Crowdfunding Money management tools Engaged investing Visualization tools Algorithmic advice Social insurance Wearables Integrated payments Contactless payments P2P payments Cybersecurity Big data analytics Compliance monitoring Future innovations Open data Identity management Financial inclusion Internet of Things Autonomous vehicles Off-rail payments Blockchain Smart contracts 9

10 Potential of payments space While the cashless payments space initially started in the US and Europe, Asia is catching up and the true potential of the region is becoming visible. Figure 5: Global non-cash transactions breakdown Non-cash transactions (US$b) CAGR Growth Global 7.9% 8.9% CEMEA 18.8% 14.1% Emerging Asia Latin America Mature Asia-Pacific Europe (including eurozone) North America 21% 27% 11.3% 9.7% 11.2% 11.9% 4.3% 4.6% 4.6% 5.5% Note: Europe includes Slovakia in eurozone and Switzerland in non-eurozone. Central Europe, Middle East, Africa (CEMEA) includes Hungary, Romania and Czech Republic. Mature Asia-Pacific includes Japan, Australia, South Korea and Singapore. Latin America includes Brazil, Mexico and other Latin American nations. Emerging Asia includes India and mainland China as well as Hong Kong and other Asian economies (Malaysia, Indonesia, Thailand). North America includes the US and Canada. Potential across SEA Across SEA, cashless payment is lower than many other countries. There is significant room for FinTech to play in increasing cashless transactions. Figure 6: Proportion of electronic transactions by geography Proportion of electronic to total transactions (%) 1 8 Canada US Netherlands 6 France Australia 4 Italy South Korea Singapore 2 Malaysia Japan India Thailand Indonesia China Number of electronic transactions per capita Bubble size represents GDP per capita 1

11 Selected transactions In 215, Fastacash, a Singaporebased social and global payment platform that allows users to transfer monetary value and content through social networks, raised US$23.5m Series B funding from venture capital investors to accelerate global expansion. In 215, M DAQ, a trading service that enables traders to trade securities in any foreign currency denominated in the local currency of their portfolio, completed its Series C funding for US$82m. In 213, My Manisku Pte Ltd, owner of stock market simulation application Tradehero received US$1m in Series A funding from China-based IPV Capital to launch its main product in China. Lenddo.com, Inc., a Philippinesbased start-up that employs nontraditional data to provide credit scoring and verification, recently completed its series B funding, estimated to be comparable to its US$2m funding earlier in 213. Figure 7: FinTech funding in Asia 7 Asian annual financing to FinTech companies (US$b) VC-backed Other investment Total VC investments rose from US$.35b to US$1.1b in 214 (+215% y-o-y) and quadrupled in 215 with US$4.6b (+31% y-o-y) US$15m 6.5 Total FinTech investment across six countries in SEA in 215 Future of FinTech FinTech is not intended as a substitute for the traditional financial services industry as it lacks the infrastructure and existing client base to stand on its own. FinTech is intended to improve the efficiency and improve access to the financial services industry globally. FinTech will work in conjunction with financial institutions (FIs) to benefit the consumers. 11

12 FinTech does not cannibalize existing players so investors can enjoy its sustainable sector growth. FinTech Benefits of partnering with FinTech Lower cost Access to younger customers Improved functionality Brand expansion Differentiation Improved customer experience Integration into the daily lives of customers Risks of FinTech alone Lack of capital Inability to reach scale or lack of customer access Risk of large financial institutions developing competing solutions The holy grail Traditional FIs Benefits of partnering with FIs Customer access Revenues from software as a service (SAAS) Access to balance sheets Legitimacy and credibility Platform monetization Reduced competition Risks of FIs alone Inability to keep pace with innovation Lack of tech talent, skills and culture Limited ability to spread investments across multiple big ideas Joongshik Wang Asean Leader, Corporate Finance Strategy What we re seeing in FinTech is the merging of tradition and technology to derive new cost and operational efficiencies. Investors who are able to recognize this trend will be best positioned to capitalize on the market opportunities that will continually present themselves. 12

13 5 Our services: PE value creation EY PE value creation (PEVC) team comprises experienced professionals focused on PE and is supported by our deep sector and functional professionals around the world. Lead advisory Commercial advisory Financial diligence Operational diligence IT diligence Carve-out Integration Restructuring Real estate Divestiture Valuation and business modeling Operational improvement Performance improvement Sales force effectiveness Business intelligence Finance Human resources Supply chain IT transformation Risk PE value creation team Private equity fund Our capabilities Focus: deliver value creation services across the PE investment life cycle Dedicated PE experience: dedicated team comprising former PE operating partners, seasoned operating executives and management consultants Broad functional knowledge: capabilities in strategy, M&A and all core operating functions; experience in revenue enhancement, cost reduction, human capital and change management Deep sector experience: primary focus in oil and gas, consumer, industrial, and health care; ability to tap into sub-sector professionals Accelerated approach: customized approach that is highly responsive and provides accelerated realization of benefits Global capabilities: dedicated team that has extensive cross-border experience with access to more than 3, consultants operating in 14 countries with deep industry and functional know-how 13

14 Contact us Service line contacts Country contacts M&A Indonesia Luke Pais Corporate Finance Strategy Vikram Chakravarty Transaction Support Purandar Rao Transaction Tax Eng Ping Yeo Teh Seng Leong David Rimbo Malaysia George Koshy Philippines and Guam Renato Galve renato.j.galve@ph.ey.com Singapore Sahala Situmorang sahala.situmorang@id.ey.com Preman Menon preman.menon@my.ey.com eng-ping.yeo@my.ey.com Valuation & Business Modelling Purandar Rao purandar.rao@sg.ey.com Vikram Chakravarty vikram.chakravarty@sg.ey.com Andre Toh andre.toh@sg.ey.com Luke Pais luke.pais@sg.ey.com Joongshik Wang joongshik.wang@sg.ey.com Sector contacts Consumer Products Financial Services Geophin George geophin.george@sg.ey.com Abhay Bangi abhay.bangi@sg.ey.com Geophin George Patrick Hanna Thailand geophin.george@sg.ey.com Health care patrick.hanna@sg.ey.com Infrastructure Ratana Jala ratana.jala@th.ey.com Piyanuch Nitikasetrsoonthorn piyanuch.nitikasetrsoonthorn@th.ey.com Abhay Bangi abhay.bangi@sg.ey.com Oil & Gas Sanjeev Gupta sanjeev-a.gupta@sg.ey.com Real Estate Benedict Lim benedict.lim@sg.ey.com Lynn Tho lynn.tho@sg.ey.com Power & Utilities Gilles Pascual gilles.pascual@sg.ey.com TMT Joongshik Wang joongshik.wang@sg.ey.com Vietnam Toan Quoc Nguyen toan.quoc.nguyen@vn.ey.com Global contacts Global Jeffrey Bunder jeffrey.bunder@ey.com Du Vinh Tran du.vinh.tran@vn.ey.com Michael Rogers michael.rogers@ey.com

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16 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. How EY s Global Private Equity Sector can help your business Value creation goes beyond the private equity investment cycle to portfolio company and fund advice. EY s Global Private Equity Sector offers a tailored approach to the unique needs of private equity funds, their transaction processes, investment stewardship and portfolio companies performance. We focus on the market, sector and regulatory issues. If you lead a private equity business, we can help you meet your evolving requirements and those of your portfolio companies, from acquisition to exit, through a Global Private Equity network of 5, professionals around the world. Working together, we can help you meet your goals and compete more effectively. 216 EYGM Limited. All Rights Reserved. EYG no Gbl ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com 16