Funding Asia's corporate growth

A driver with motorbike taxi service Go-Jek in Jakarta. Last year the Indonesian startup raised $550 million, led by private equity firms KKR & Co and Warburg Pincus. AFP

Private equity was once the sole domain of cashed-up US and European funds.

That perception has changed due to the growth of China and its knock-on effect throughout Asia. Economic growth has seen millions taken out of poverty and has created an expanding middle class.

Asian businesses such as startup tech companies have become sought-after targets for private equity.

Last year saw Indonesia's ondemand motorbike taxi service Go-Jek raise $550 million, led by private equity firms KKR & Co and Warburg Pincus.

Another is ride-sharing service Grab, launched in Malaysia and now available in several countries across the region. It raised $750 million, led by Japanese corporation the Soft-Bank Group.

With Southeast Asia growing at a faster clip than Europe and the United States, private equity is well placed as the "capital pool of choice" for investors, said Luke Pais, leader for private equity in the Association of Southeast Asian Nations region at professional services firm EY.

"Entrepreneurs need good partners and there is no better partner than private equity to create long-term sustainable value," he said.

The growing volatility on global equity and currency markets, threats of trade wars, growing protectionism and increasing debt levels have had little impact on private equity investors in Southeast Asia.

Last year was the third successive year that the private equity industry in the region performed at historic or near historic levels.

Indonesia, the Philippines, Thailand and Vietnam have seen enormous corporate growth in recent years but to continue that expansion and grow beyond domestic borders they will need capital.

Entrepreneurs must look beyond traditional bank financing and retained earnings to fund their growth aspirations — and private equity is one of those vehicles, Pais said in EY's latest Private Equity Briefing report.

Suvir Varma, head of the Asia-Pacific private equity practice with Bain & Company, a business consulting firm, said that while investors in the region keep an eye on global challenges, "these trends have yet to impact the region's private equity market".

"Asia-Pacific private equity funds still have ample attractive opportunities as global volatility has not hit earnings of companies in the region, and there is still strong investor interest in Asia-Pacific given Asia-Pacific private equity's high returns — especially relative to public markets," he told China Daily.

"Having said that, leading private equity investors are increasingly incorporating macro scenario planning into due diligence and portfolio reviews, to pre-emptively identify any potential risks and ‘weatherproof' their portfolio companies."

Last year, the value of private equity deals in Asia Pacific topped $92 billion — a pullback from $124 billion in 2015. Even so, 2016 was still the second-best year on record, according to Bain & Company.

In Southeast Asia, deal value bounced back from $4.8 billion in 2015 to $6.8 billion last year, 14 percent higher than the 2011-15 historical average.

Singapore continues to be the largest market in Southeast Asia, accounting for around 40 percent of Southeast Asian deal value from 2012-16.

The entry of new types of players such as corporates, limited partners and sovereign wealth funds has resulted in intensifying competition.

"Sources of value are shifting across Asia Pacific, making it tougher to deliver outsized returns," Varma said.

General partners, as private equity firms are also known, are working with near record levels of unspent capital. Varma said firms in Singapore will find it increasingly important to develop a differentiated angle across the value chain.

"They will need to develop smarter sourcing to build a robust pipeline around their deal sweet spot, enhance due diligence capabilities to develop proprietary views on their targets, and double down on portfolio value creation so they can get a head start from day one," he said.

"Many general partners based out of Singapore are also diversifying their investment strategies by targeting investments in other Southeast Asian markets, like Indonesia, Malaysia and Vietnam."

Analysts say sovereign wealth funds are devoting more and more of their private equity allocations to direct investments. Areas such as healthcare and technology have become major targets.

Late last year, Singapore-listed company New Silkroutes Group formed a joint venture with three parties, including the Singapore subsidiary of China's Nanshan Group. The project aims to develop private equity funds to focus on healthcare and infrastructure in Asia Pacific, including Japan and Australia.

The new Singapore-incorporated entity, New Silkroutes Asset Management, will initially focus on the healthcare sector.

The number of people in the middle class in Asia Pacific is expected to rise to 3.2 billion by 2030 from 525 million in 2009, according to the Organization for Economic Cooperation and Development.

This increase, together with growing affluence, is expected to drive demand for better quality medical treatment and care.

Analysts say private equity still has a strong appetite for high-growth technology companies.

Internet, technology, media and telecoms companies attracted $42 billion, or 45 percent, of total investment value last year. Internet deals alone accounted for more than a third of the total, continuing a five-year trend, according to Bain & Company data.