The overall value of private equity deals in 2016 rose 42% year-on-year to reach US$7.8 billion in Southeast Asia, driven largely by the technology sector, in particular the staggering US$1.3 billion raised by the region’s two ride-hailing apps in Q3 2016.

The technology sector was at the forefront of investor focus in 2016. While 2016 started with declining volume as investors took a more tentative approach when assessing investments in the sector, there was healthy investment activity in the second half of the year.

This is according to the EY Private equity briefing: Southeast Asia (April 2017) report. In 2016, the overall deal volume was down from 162 deals in 2015 to 123 deals. In Q1 2017, while PE volumes were relatively aligned with the previous quarters, fundraising had increased. The total funds raised in Q1 2017 was US$2.8 billion, compared to a total of US$2.3 billion raised across the full year of 2016. The trend of large PE deals in 2016 is expected to set the tone for dealmaking in 2017.

Luke Pais, EY Asean M&A and Private Equity Leader, Ernst & Young Solutions LLP, says: “We expect a continued uptick in deal activity this year. Market conditions in Southeast Asia are currently attractive for PE investments. While there are short-term headwinds, the long-term prospects of the region remain solid. It is a good time for businesses with ambition to work with PEs to consolidate their domestic and regional positions. There remains greater PE interest in the technology sector as companies and business models of scale emerge. However, we do see deals taking time to complete and hard work required post-investment to realize the investment thesis.”

Early start critical to successful PE value creation
Separately, an EY poll with PE executives representing global and regional funds, which was conducted in February 2017, affirmed the emphasis on value creation in an investment. An overwhelming 95% of those polled indicated that the ability to create value in the portfolio is an important consideration during investment stages.

The poll also found that most firms prefer to stay invested with existing management to drive value creation. More than three-quarters (78%) of the respondents indicated that in their experience, both the PE firm and the management team had worked on the 100-day plan together. Board reviews and operational reviews were the two top approaches that were used to track performance against plan.

Karambir Anand, Partner, transaction advisory services, Ernst & Young Solutions LLP, says: “While it is clear that most PE firms regard operational improvements to be highly important in the investment decision and lifecycle, very few have mastered the art of achieving full potential in this crucial area. Having an idea of the value creation initiatives at the time of investment decision-making is key, as is having a robust implementation masterplan and the capabilities to track benefits.”

Yet, just under a-quarter of the respondents (22%) rated their past value creation efforts successful to a great extent; in fact, 16% of the respondents revealed that their past efforts were less successful than expected.

Anand explains: “A few oversights can create issues in the implementation of an operational value creation programme. For example, not involving the operational team early in the deal process can result in a disconnect between the deal team and the implementation team. The PE firm should establish a dedicated operational team to support the portfolio company in achieving the value targets. Additionally, the proposed value creation program should be tested to confirm the validity of the targets, so that the operational change program will not undermine the corporate strategy of the company.”

The poll also revealed that the highest value creation opportunities came from financial management (78%), logistics and supply chain (50%) and sales force productivity (33%), while outsourcing and shared services (11%) was seen as having lesser impact.

Anand concludes: “Operational value creation goes far beyond slashing costs or implementing a land-grab strategy for revenue growth. A sustainable operating model should be established to execute on the corporate strategy without jeopardizing efficiency or flexibility.”