PETALING JAYA: South-East Asia, including Malaysia, are on the radar of private equity (PE) firms as they eye specific sectors amid uncertainties.
These firms are taking a long-term view and are upbeat of the growth potential of PE market deals in the region.
PE is an alternative investment class and is composed of funds and investors that directly invest in private companies, or engage in buyouts of public companies.
Maybank Investment Bank (Maybank IB) head of advisory Reza Mohd Zin told StarBiz that PE firms have a three to seven years investment horizon and generally take a longer term view of sectors and geographies when evaluating investment opportunities.
Notwithstanding the uncertainties, he said the general view of these firms is that South-East Asia, including Malaysia, still has growth potential over the next three to five years.
The uncertainties facing PE firms include geo-political risk with the Russia-Ukraine war, soaring inflationary pressures and global supply disruptions.
“The regional economies are projected to recover to pre-Covid-19 pandemic growth rates as restrictions are lifted and economic activity resumes. The re-opening of borders will also contribute to recovery in travel and trade in the region.
“Relative to Western economies, the region’s population is young and growing with rising disposable incomes and tech-savvy. These are strong drivers for various sectors such as consumer, retail, eCommerce and Internet services,” Reza added.
Preman Menon, who is the Malaysia Strategy and Transactions Leader in Ernst & Young PLT, said the PE market has proven resilient in the face of a shifting global economy and ongoing disruptions related to the pandemic.
However, he said uncertainties surrounding the ongoing geo-political and other global challenges remain.
“Dry powder continues to remain high, but it is safe to say that the PE players are watching the space closely to ascertain the impact on their various portfolio companies and working with them towards navigating in a challenging environment, including that related to supply chain,” Preman noted.
South-East Asia’s private equity market has rebounded from the pandemic, with deal value reaching an all-time record high of US$25bil (RM110bil), which more than doubled the 2020 figures. Based on the 2021 activity, he said investors have revealed that they are keen to make up for lost time and this emphasis is expected to cascade down to 2022.
“We expect some PE exits this year and next year, as a number of exits were put on hold in the past couple of years due to the uncertainties posed by the pandemic.
“However, as borders and economies have opened up again, we see postponed sale processes coming to the market,” Preman added.
On the sectors that would attract PE interest in Malaysia and in the region for this year, Reza said he expects to see continued PE interest in healthcare, which he believes is a secular trend (not pandemic-driven) as rising incomes increase demand for quality healthcare services.Related sectors such as pharmaceuticals, biotechnology and medical devices would also benefit from this trend, he said
He said the consumer and retail sector is also expected to benefit from the rebound in spending as Covid-19 restrictions are lifted. Longer-term, the favourable economic and demographic characteristics of South-East Asia, including Malaysia, would be key drivers of this sector, he noted.
“The technology and Internet sector will likely see some downward pressure on valuations, in tandem with the drop in valuations of high-growth tech stocks globally.
“But we expect to see continued interest in the sector given the potential to deliver outsized returns where the technology is innovative and disruptive,” Reza added.
For Malaysia, he continues to see strong interest from PE firms, as the country is one of the larger economies in Asean with a well-established and conducive regulatory framework for inbound investment.
There are also several PE-held assets in the consumer, education, healthcare and industrial sectors that are ripe for exit and believes would be coming to market soon, Reza said.
Meanwhile, Preman said among the challenges that would impact the local PE market would be the fact that local companies which are the potential targets for PE firms have not fully embraced environmental, social and corporate governance (ESG) policies.
He said this would result in difficult investments, especially given that most PE funds have signed up to ESG policies as part of their fundraising. PE funds and their target companies that have adopted a practical approach as part of their investment appraisal, including identifying ESG gaps and ‘fixes’, would likely do well in this regard.