SEA deal activity by private equity and venture capital on a slide

Investments made by private equity (PE) and venture capital (VC) across Southeast Asia (SEA) has slowed considerably in the first quarter, amid the Covid-19 pandemic-led crisis. 

In the first three months of this year, private equity and venture capital firms invested over $1.4 billion across 141 deals in the region, roughly equal to the level of the fourth quarter of 2019, but considerably lower than the quarter before that. However, deal value plummeted by over 20% compared to the previous quarter to a value of just over $1.4 billion.

Compared to the same period last year, private equity aggregate deal value plunged 47% from $2 billion, while deal volume dipped by almost a quarter to 16 in Q1 2020 from 21 in Q1 2019. Venture capital deal value of disclosed transactions in Q1 2020 fell by a staggering 82% to $392 million from $2.1 billion last year. Volume fell moderately by 7% year-over-year (y-o-y) to 125 in this year’s first quarter. The largest deal in Southeast Asia was the $706 million investment by MUFG Innovation Partners and Krungsri Finnovate in Singapore-based software application Grab Holdings, followed by the $89 million investment by Norwegian Investment Fund in Myanmar’s Yoma Bank. 

Fundraising activity saw a major drop as well, with Q1 2020’s total of $1.3 billion a fraction of the $13.5 billion noted in Q4 2019. Compared to Q1 2019, the decline was 11%. 

Exits

Despite a record high in dry powder, estimated to be around $439 billion for Asia-Pacific as of May 2020, EY suggests that the muted deal environment will incite fund managers to shift their focus away from inorganic activity. Instead, they will focus on preserving value and pursing organic growth in their portfolio. This in turn will result in a wave of divestments as funds reorganise their portfolios, which will drive exit activity later this week. 

Over the last 8-12 weeks, investors have focused on dealing with Covid-19-induced issues, such as liquidity, protecting their people, accessing incentives and ensuring that short-term adjustments are made to ensure the business has adequate resources and support to weather the storm. Having addressed these short-term issues, they are now pivoting at more mid- and long-term priorities.

“We expect to see activity in the areas of structured finance, public to private, capital recycling, non-core divestments, and sector and segment consolidation,” said Luke Pais, Head of EY’s ASEAN M&A and Private Equity practice. 

Geophin George, a partner in EY’s Strategy and Transactions practice, anticipates private equity-backed exits “to get back on track by the beginning of next year.” 

Vikram Chakravarty, also a partner in EY’s Strategy and Transactions service line, said that investors will need to carefully weigh their offensive versus defensive strategy in the coming period. Because, learning from past recessions shows that private equity and venture capital players “that were able to take bold actions down the line emerged as top gainers.”

EY’s findings mirror a recent analysis by L.E.K. Consulting of 100 dealmakers in Southeast Asia, which concluded that investment scrutiny by banks and hesitant investors is substantially slowing down deal flow.

Last year, EY was named one of Asia’s top financial advisors for mergers & acquisitions.