Smaller Asian markets to top China for deals this year

General partners expect that smaller markets in Asia such as Singapore, Malaysia, Thailand and the Philippines among them, will top China as the most attractive markets for new deals in 2015.

But competition for deals will remain strong and asset prices will remain under pressure, according to Bain & Company’s Asia-Pacific Private Equity Report 2015.

“Private equity investors looking to diversify their exposure to the much larger markets of China and India have piled into Southeast Asia, hoping that the fast-growing sub-region would catch fire,” the report noted. But strong competition, too few targets, macroeconomic and political issues mean “they are still waiting”, the report stated.

One-third of GPs—compared with 5 percent a year ago—said they believe local companies have a good understanding of the private equity value proposition, which could mean the pool of potential targets is deepening, according to the report.

Bain also saw “anecdotal evidence of an increasing number of carve-out opportunities as large companies seek to shed Southeast Asian units”.

In China, the private equity market is well on its way to building a foundation for steadier, more sustainable long-term growth, the report said.

“GP’s report that sellers looking for help navigating a less certain future have warmed significantly to the private equity value proposition,” according to the report.

GP’s will have to look for deals in economically resilient sectors such as healthcare, the consumer sector, business services and technology. They will also have to consider more carefully whether a deal is the right mix for their portfolio.

“The strongest returns will flow to those that take an activist approach, especially when it comes to shoring up talent and building more professional organisations,” the report stated.

In India, GPs on the ground unanimously expect new investment activity to improve in 2015, “The market is hopeful that better economic stewardship by the Modi regime will unlock sustainable economic growth,” the report stated.

In addition, “greater optimism and strong equity markets should encourage more exits, helping GPs clear out their troublesome pre-2008 deals and return more capital to investors,” the report said. However, since this process is expected to take time, some “sacrifice on returns” may be required.

The report said that in India e-commerce will continue to attract dealmakers, while secondary deals, which have been an important source of investments over the last three years, may provide further opportunities.

“Given high valuations, which are rising along with the equity markets, it will be critical that GPs continue to lock in more minority deals with path-to-control provisions.”