SE Asia PE deal count drops 38% in H1 2016

A slowdown in technology investments and a pricing mismatch in Indonesia have taken their toll on deal activity in South-East Asia, according to a report from Ernst & Young.

A drop in investment in the technology sector is the primary driver behind the fall in the number of private equity deals in the first half of 2016, EY said in its latest Private Equity Briefing: South-East Asia report.

The number of private equity deals in the region from January to June this year plummeted to 52, 38 percent lower than the 71 deals done in the same period in 2015. However, the overall value of deals remained consistent at $1.2 billion, compared to $1.4 billion and $996 million for the first and second half of 2015 respectively.

According to the report, technology investments in the region have fallen by more than 40 percent as investors become increasingly selective about where to put their money.

“What’s happened in the last six months is fairly consistent with what’s happening globally. Tech investors have become more discerning about the themes they are chasing,” Luke Pais, EY Asean leader for M&A and private equity told Private Equity International.

“For instance, themes around the sharing economy are still doing very well. But capital raising is a bit harder now because investors are becoming pickier as to what will succeed.”

In addition, investors are strongly focused on the scalability and sustainability of the business model.

“In South-East Asia, it is less about creating new technology and more about taking business models that have worked in other, more advanced jurisdictions like the US and replicating these in the home market with some localisation. Investors are therefore very focused on the ability to scale as well as the unit economics of the business.”

Top investments in the tech space this year include Baring Private Equity Asia’s almost $140 million investment in telecommunications company Telus International and Broad Peak Investment Advisers’ $40 million purchase of Singaporean-Israeli start-up Trax Technology.

In Indonesia, unfinished deals or deals that have fallen through because of pricing have also contributed to the falling deal count. Pais pointed out that it is important to understand Indonesia’s macro-economic backdrop.

“In Indonesia, its story has always been about growth. But that hasn’t been very evident in the last two years because currency volatility, a drop in consumer confidence, lower demand for commodities and, consequently, a more conservative approach to spending has impacted both consumers and businesses. What manifests in the financial statements is lower profit margins and higher working capital, as well as financing costs,” Pais said.

“In that situation valuation is always a discussion. Entrepreneurs intrinsically believe their companies are worth much more than what the current market might dictate.”

While the country has seen an upturn in private equity activity in recent years following national elections in 2014, investors still face unclear rules and regulations, sudden unpredictable changes, and bureaucratic red tape.