South-east Asia deal-making slows in 2022, but energy transition sparks investor interest: Bain report


DEAL flow in South-east Asia slowed in 2022, with a sharp decline in the second half of 2022, according to data from a Bain & Company report. However, the regional energy transition is a bright spot attracting more investor interest.

There were 176 private equity investment deals in 2022, a drop from 207 in 2021. Deal value also fell from US$27 billion in 2021 to US$13 billion in 2022.

“What we are seeing is a natural reaction to the global macro climate. Increasing interest rates, a softening economic environment and general uncertainty over the future have all made it more challenging to get deals done,” said Usman Akhtar, head of Bain’s South-east Asia private equity practice.

Similarly, exit values declined 46 per cent from US$12.2 billion 2021 to US$6.6 billion in 2022, with the exit count dropping from 21 to 18 in the same period.

In the years ahead, exits and the return of capital to limited partners will be a driver of their continued interest and excitement in the region, said Akhtar. “It will be an important indicator that we will be watching.”

Investors in the region are most concerned over macroeconomic conditions slowing down exit plans, with over 40 per cent of them citing it as a key concern. Other growing concerns include increased competition from other funds and a lack of deal opportunities in the market.

South-east Asian investors are also more negative on the region’s macroeconomic environment. About half of 23 respondents have a low confidence or somewhat low confidence of a more favourable macroeconomic environment in the next 12 months.

Relying on expanding multiples from subsequent funding rounds to drive returns has trended downwards. Now, only 13 per cent of investors believe that multiple expansion will drive returns, with 14 per cent believing it will drive returns in five years.

Currently top-line growth, along with cost improvement and capital efficiency, is what investors believe will drive returns, with both factors trending up.

Now, 47 per cent believe that top-line growth will drive returns, with 50 per cent believing it will drive returns in five years’ time. Some 26 per cent of investors believe that cost improvement and capital efficiency will drive returns now, while 25 per cent believe it will drive returns in five years.

“It does indeed look as if there’s a lot less belief that funds can expect multiple expansion to be a key driver of returns in the environment that we’re in today and the environment that’s expected going forward,” said Akhtar.

Energy transition opportunities
There is a bright spot for South-east Asian investors in riding the energy transition in the region, with opportunities for both early and mature-stage capital to deploy into. In particular, three sectors of energy, nature and agri-food can capture 90 per cent of the emissions in the region.

Renewable energy in solar and wind has seen capital injections, as the need for capacity deployment in South-east Asia is enormous, noted Tom Kidd, a partner in the private equity practice at Bain. This segment will represent a US$30 billion opportunity by 2030, with solar representing US$20 billion.

Sustainable farming is another area gathering investor interest, representing a US$30 billion opportunity by 2030. With many markets in South-east Asia having agriculture as a large part of their economy, there is a need to increase agricultural yields in a sustainable way, according to Kidd.

“As you think about the need for precision agricultural technology and more advanced nutrients, all those things are attracting capital and have applications in South-east Asia,” he said.

The electric-vehicle value chain is also getting investor attention, with growing interest in Indonesia’s nickel supply. Akhtar noted that investors are looking at whether there is a way to enter this value chain that could be potentially crowded out by strategic investors from the electric-vehicle sector.

“While that is one of the energy-related transition themes that has South-east Asia at its very core, it is still one that investors are still studying and trying to understand what potential plays may be for themselves,” he said.