Private equity players with Southeast Asian portfolio companies have grappled with the worst year to make money and hand back cash to their limited partners (LPs) as exit leeways narrowed in the high-rate market conditions in 2023.
The region last year recorded the most depressed exit environment since 2017 with deal value diving as much as 60% to $2.8 billion from the previous year, a far cry from the time when investors were paying for nosebleed valuations for star unicorns like Grab in 2021. Exit count fell 70% from 21 deals in 2022 to six in 2023, where Singapore continued to be a hotspot for deal-making, according to a recent Bain & Company report.
“Exit is a material issue for Southeast Asia because LPs need to see the recycling of capital in order to make the decision to keep allocating in the future and can feel that they have a full cycle of capital,” said Bain’s head of SEA private equity practice Usman Akhtar.
Investors in the region said that exit routes and deal supply are among the key concerns in the current macro backdrop, the Bain report noted citing a survey. Most respondents said last year’s exit environment was more challenging than 2022, pointing to ‘macroeconomic softness’ as the primary reason. More private equity investors see lower returns for Southeast Asia in the next 3-5 years.
Meanwhile, holding periods are getting longer for the wider APAC region. More than 50% of funds in the 2010-2012 vintage years had made exits within the first 3-5 years of the cycle, the typical holding period for PE funds. However, the number of funds that can do so has been decreasing over the years. Funds in the 2016-2018 vintage years, which should have been making exits in the last three years, have been unable to follow that timeline.
Rising secondary deals
As global GPs are navigating alternative exit routes, secondhand stake sales that range from the typical GP-led transactions, dividend recaps to staple deals are happening across APAC, according to Bain Global Private Equity’s advisory partner Suvir Varma.
He is also seeing partial-exit deals in Southeast Asia where the buyer universe extends to promoters (founding families or members of a business) and corporates.
“While the full exit may be hard to do, you can often find a partial exit [through a sale] either back to the promoters or strategic investors. Many of these [sponsor-backed] businesses in Southeast Asia used to be led or owned by founders or founding families of family-owned businesses, which is the biggest driver of deals in the Southeast Asian market,” according to Varma, who added that India has also witnessed transactions of similar nature.
“Because values have depressed in the last couple of years, the promoters are often willing to buy some part of the business back and consequently create liquidity [for the GPs],” he added.
Strategic investors in recent times have been cutting cheques for secondary stakes in Southeast Asian companies without the intention to take full ownership, the Bain partner observed.
“GPs are getting partial liquidity by bringing in a new investor for some of their stakes. There’s lots of creative ways to create liquidity outside of an outright sale,” Varma observed.
Exit accelerator
Turning to local stock exchanges that were once overlooked and executing operational improvement have emerged as exit routes and return drivers that could alleviate the prevailing conditions in Southeast Asia, according to Bain partners.
While initial public offerings in the region have generally not been a primary source of exits for private equity deals, Akhtar believes in the potential of the local bourses.
“If you look at the depth and liquidity of the market as well as the velocity of trades within the market, you’re not seeing as much activity as you’re seeing in other developed markets. There’s an opportunity for these different stock exchanges to mature over time and create more liquid and attractive exit markets for local companies,” he said.
In an era where multiple expansions are not easy to come by and debt is not cheap, investors are increasing their focus on operational improvements of their portfolio companies.
“The process [of cost improvement and capital efficiency] starts during due diligence, but we’re also seeing investors increasingly become more proactive at the end of their whole period, knowing that they want to exit within 18-24 months from now,” said Akhtar who highlighted that investors are thinking about reducing unit costs and increase margins to make sure that the business is set up well to exit in the future.
Overall deal value in Southeast Asia fell 39% to $9 billion last year compared to the previous five-year average (2018-2022), while deal volume dropped 24% in the same period, per data compiled by Bain.