Bain & Co saw private equity market dipped in 2022

Bain & Company’s Southeast Asia Private Equity Report 2023, released today, highlights that although there was a deceleration in deal activity in 2022 in Southeast Asia’s (SEA) private equity (PE) market, the region’s underlying macroeconomic fundamentals remain robust over the long run.

According to recent data, deal activity in Southeast Asia’s (SEA) private equity (PE) market experienced a decline in 2022, with a 52% drop in deal value compared to the previous year and a 15% year-on-year decrease in deal count.

Despite matching 2021 activity levels in the first half of 2022, activity in the region decreased in the second half of the year. Notably, growth deals remained the predominant form of activity in the region in 2022, with the buyout sector experiencing the most significant relative decline.

Singapore and Indonesia continued to attract the bulk of investment capital in SEA in 2022, accounting for over 80% of the region’s deal value and deal count, but activity across all regions declined during the year. Internet and tech continued to lead as the primary investor sector in each country, with healthcare and financial services positioned as the second and third largest sectors across geographies.

As a point of reference, according to Bain’s Asia Pacific Private Equity Report 2023 released last month, Greater China saw the greatest fall in deal value in the region at 53%. Deal value in Australia-New Zealand, Korea, Japan and India dropped 48%, 39%, 28% and 25%, respectively.

“What we are seeing is a natural reaction to the global macro climate. Increasing interest rates, a softening economic environment and general uncertainty over the future have all made it more challenging to get deals done,” said Usman Akhtar, head of Bain’s SEA PE practice, based in Singapore.

Exit value in SEA also fell 46% year-on-year as investors struggled with the re-rating of public market valuations, deteriorating portfolio performance and fewer avenues for exits given the decline in IPOs.

The internet and tech sector saw fewer large ticket investments and lower overall activity levels in 2022 vs. 2021 but still accounted for the bulk of deals done in the region, accounting for 55% of total deal volume in the region in 2022.

Beyond the internet and tech sector, several other areas continued to attract capital. One to highlight is healthcare, which has seen sustained investor interest on the back of clear secular trends (e.g., aging populations and rising affluence) and innovation across the value chain (e.g., emerging models outside of the hospital and new digital health tools).

Bain also sees opportunities in the broader energy transition space. For SEA countries to meet their long-term carbon reduction goals, there needs to be investment across sub-sectors such as energy production, agriculture, and waste management.

Despite near-term uncertainty, the long-term outlook for private capital investment in SEA remains positive. Bain’s analysis showed that macroeconomic conditions in SEA have been more resilient than the rest of Asia Pacific. Real GDP growth in SEA continued to be strong while inflation related indices remained moderate. In addition, ongoing geopolitical tensions between the US and China will continue to create opportunities for SEA businesses.

As always, the challenge for investors will be to do the basics well – sourcing good deals and driving value in their portfolio companies. According to Bain’s survey with SEA GPs, investors are increasingly shifting their value creation emphasis to cost-focused efforts.

“SEA remains an attractive place to deploy capital in the long term. The market fundamentals are there, and investors will be able to find attractive opportunities. However, competition will be intense for these assets and multiple expansion will no longer be a sustainable return driver. That puts more pressure on investors to create value during their ownership period,” said Suvir Varma, senior advisor of Bain’s global PE practice, based in Singapore.