Investment is expected to accelerate in 2021, driven by large private equity and venture capital firms that resumed deal making at the end of 2020 after a months-long hiatus. Although large firms are expected to reap most of the benefits in the short term, that dynamic could shift as more global fund managers and venture capitalists look to expand and open offices in South East Asia.
These are just a few of the insights offered by a panel of financial experts who participated in Vistra’s presentation, 2021 private equity market outlook and trends in South East Asia. Here are a few other highlights from the wide-ranging discussion.
Changes in underwriting and deal flow
For the first three quarters of 2020, cautious investors kept their cash in hand, but confidence rebounded in the fourth quarter. Sixty-six percent of last year’s capital was raised between October and December, and despite the tough conditions, assets under management grew, albeit at a slower rate than in previous years.
The travel and social distancing restrictions that prevented in-person meetings had a negative impact on fundraising, which dropped 14 percent compared with 2019, and made underwriting and deal flow difficult.
General partners (GPs) and limited partners (LPs) who hadn’t already established strong relationships before the pandemic were reluctant to do virtual underwriting, said Michele Lee, a director at Capstone Partners. For American firms and GPs and LPs who already knew each other well before the pandemic, however, digital deals generally were not a problem.
There were fewer buyout deals, and average deal size shrank by a quarter. But as offices reopen, these problems will soon be in the rear-view mirror. Eighty-nine percent of private equity investors said they plan to maintain or increase investments in 2021, according to a survey by data analytics and alternative assets firm Preqin.
Established companies, which made up nearly 60 percent of funding in 2020, are likely to obtain even more funds in the coming year, while firms that lack well-known investors and backers will have difficulty raising capital, said panellist Ee Fai Kam, senior vice president, head of research and data operations at Preqin.
A new normal for offices
Though travel restrictions are beginning to lift and employees in some countries — notably China — have returned to work, virtual meetings and an emphasis on digital research are likely to remain the norm for the first half of 2021 amid difficulties with vaccine production and distribution and a virus resurgence in some countries.
More offices will re-open in the year’s second half, but don’t expect a return to business as usual. Working from home has been successful for knowledge workers, with many studies showing increased productivity. Some companies have redesigned their buildings not only to accommodate social distancing restrictions, but to prepare for a future in which employees come in two or three days a week for small-group meetings and spend the rest of their time Zooming with clients from home.
This model will allow firms to occupy smaller offices and reduce commercial real estate capital expenditures, particularly in high-priced global capitals. Instead of concentrating staff in big headquarters, private equity firms are likely to open more branch offices in Asian countries where they do business, Lee said. As a result, they will gain greater and earlier exposure to local deals.
Establishing a stronger presence in Singapore
Singapore, already an important foreign investment hub, is attracting more interest with the advent of Variable Capital Companies (VCCs), the country’s new, more flexible corporate structure for investment firms, which debuted in January 2020.
“In recent weeks, we’ve been seeing big, global names in VCCs. They have kicked off in a positive way,” said panelist Jek Aung-Long, partner, Singapore office head, and head of investment funds at international law firm Simmons & Simmons.
Aung-Long is also starting to see some interest in special purpose acquisition companies (SPACs) in South East Asia. “Given the ongoing political tensions in the region, it may be an opportune time for Asian financial centres to accommodate such structures,” he said.
More global asset managers are setting up in Singapore, including some who relocated from Hong Kong amid protests and increasing mainland controls, and others who fled the UK after Brexit. American firms have also opened new offices in the country recently.
Investor interest in Singapore is especially strong for technology companies, said panelist Mriganko Mukherjee, partner, financial services, international tax and transaction services at Ernst & Young Solutions. “Real estate, the old favourite, is also doing pretty well, and includes investment both in core spaces and data centres,” he said, adding that the healthcare and education sectors are also attracting interest.
Increasingly, firms are not just sending fund managers to Singapore, but establishing domiciles there, Mukherjee said.
“Singapore offers tax and regulatory stability, and the government managed the pandemic very well, creating a positive impression. It is a relatively easy place to live, work and find talent,” he added.
Emerging investor targets: Vietnam and Indonesia
Investors are also attracted to manufacturers who have flocked to ASEAN countries in recent years, panellists said. During the US-China trade war, many consumer goods firms closed operations in China and set up shop in Vietnam and Indonesia, which lie along the same supply route. Even if US-China relations start to thaw, these plants will remain in business.
“Once you’ve created a manufacturing hub in Vietnam, you’re not going to wake up tomorrow and shut it down,” Kam said.
Developing South East Asian countries offer lower labour costs than China, have deep pools of young workers and are eager to do business with foreigners. “Indonesia, for example, has a young and growing population full of talent and energy and intent on generating wealth. Its vibrancy is attractive to investors,” Kam said.
To learn more about private equity trends in South East Asia, watch the webinar.
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