The private equity (PE) deal value in Southeast Asia (SEA) fell 39 percent to $9 billion last year compared to the previous five-year average (2018-2022), while deal volume dropped 24 percent in the same period, Bain & Company said Thursday.

The global consulting firm said in its latest Southeast Asia Private Equity Report, while the second and third quarters of 2023 saw growth over the first, SEA’s PE market was not spared from the slowdown in deal activity seen globally.

Like in previous years, it said SEA growth investments accounted for majority of deal flow in the region.

Singapore and Indonesia continued to contribute to the bulk of deals, it said.

Meanwhile, SEA deal activity dropped off in the first quarter of 2024. At $1.4 billion, the region’s deal value was back at the same level as the first quarter of 2023.

“It has been a challenging year for dealmaking, exits and fundraising in SEA,

“Findings from our industry survey point to some of the drivers behind these challenges,” said Usman Akhtar, head of Bain & Company’s SEA PE practice, based in Singapore.

According to him, general partners (GPs) and limited partners (LPs) are telling them that the areas they are most concerned about are challenging exit conditions, lack of deal opportunities and uncertain economic outlook.

“There is significant pent-up demand to deploy capital in SEA, but to help spur exits, investors acknowledge the need to generate value across cost and topline opportunities,” he added.

Bain & Company’s survey also revealed that SEA investors expect to face competition from both local and global PE firms and strategics this year.

Learning from experience in recent years, they are also now focusing more heavily on the need for attractive entry multiples and clear exit strategies in new deals.

In addition, SEA investors view cost improvement and merger and acquisition (M&A) as increasingly important levers to drive returns.

According to the report, global infrastructure and private credit fundraising are rising.

Cited a June 2023 survey by Preqin, it said more LPs indicated that they plan to invest more in private credit and infrastructure funds compared to other alternative asset classes.

Since 2021, Bain has observed that PE-focused alternative asset managers have raised large Asia-Pacific-focused infrastructure and credit funds.

2023 also marked a crescendo in healthcare dealmaking, accounting for 24 percent of SEA deal value, due to several large deals in the provider space.

The previous high was in 2019 where healthcare deals made up 22 percent of SEA deal value.

Despite a broader tech and internet slowdown, fintech and insurtech were key investment trends in SEA in 2023 with funding increasingly focused on scale players with strong business models.

Fintech, in particular, has seen deal size increasing between 2018 and 2023, with total deal value growing at a 12 percent compound annual growth rate (CAGR) in the same period.

As population, urbanization and gross domestic product (GD)P per capita continue to rise in SEA markets, Bain expects consumption to grow.

Hence consumer products companies will become a hotspot for PE investors.

This is particular in the areas of (1) large scale businesses with strong brand health fundamentals but suffer from challenged profit and losses (P&Ls) that require performance improvement changes, (2) large scale and heritage businesses with currently weak brand health fundamentals but sound underlying P&L that can be leveraged to return to growth, (3) companies with limited potential for further core growth with potential for growth through product, channel or geographic adjacencies, (4) small scale businesses with early on penetration/growth curve, strong brand health fundamentals and healthy P&L, (5) improving market positioning or reducing cost through consolidation and integrating multiple sub-scale players, and (6) carveouts of established businesses with strong fundamentals but no longer aligns with parent company direction.

The report also showed dry powder levels across Asia-Pacific (including SEA) remain very high, while investors in SEA appear less concerned about entry valuations than they have been in previous years.

SEA investors have accumulated significant pent-up demand to put their capital to work and start to change the recent trajectory of the region as a PE destination.

Penetration of the PE industry has significant headroom when compared to several other parts of Asia.

“SEA PE remains underpenetrated as a percentage of GDP given the size of target opportunity pool,

“Moving forward, we think the industry in SEA needs a few things to help unlock a resurgence in deal activity,” said Akhtar.

According to him, exit overhang needs to be addressed with proactive steps required to exit aged assets.

“We think stock exchanges need to strive to build their velocity, liquidity and depth,

“There also needs to be visible traction in operational improvements in PE-owned assets as playing the macro story will no longer suffice,” he added.

Bain & Company: global healthcare private equity deal reaches $60B in 2023