private equity briefing: southeast asia – july 2017 · private equity briefing: sea 2 ... center,...

1Private equity briefing: SEA

Private equitybriefing:Southeast AsiaJuly 2017


This quarterly briefing offersyou a roundup of the privateequity deals and capitalactivities across majorsectors in the quarter andtrends that are shapinginvestment decisions today.

It distills the perspectives ofour teams of subject-matterprofessionals in the regioninto pertinent insights tokeep you ahead in navigatingthe private equity landscape.


Contents4 5 7 8 12

1Outlook

2Investments

3Exits

4Fund-raising

6Data analyticsfor PE

15

7Our PEserviceofferings

9

5Industry infocus:Consumer


1Q17 private equity (PE) deal activity continues to remain robust amidincreased fund-raisingThe overall value of PE deals completed in 1Q17 was US$2.2b, across the 33 deals closed. The quarter’s performancehas been relatively aligned with the previous two quarters. Singapore deals comprised approximately 45% of PEactivity in 1Q17, led by the privatization of ARA Asset Management. We expect the robust deal activity to continue forthe rest of the year.

In addition, PE fundraising has been on the rise with US$2.8b funds raised in 1Q17 compared to a total of US$2.3braised across the year 2016. Amid high global liquidity, there have been large Asia-Pacific-focused funds raised byKKR and TPG. In addition, Southeast Asia-focused fundraising has been active as the region remains one of the highergrowth regions in the world.

In this issue, we share our perspectives the consumer products sector, which has been one of the favorite sectors ofinvestment for PE over the last decade and a half. While there is still a lot of opportunity in this sector given the long-term theme of rising middle class, PEs need to focus on strong operational value creation to drive value.

Outlook1

Luke PaisAsean LeaderM&A and Private EquityErnst & Young Corporate FinancePte Ltd

“Market conditions in Southeast Asia are currently attractive for PE investments.While there are short-term headwinds, the long-term prospects of the region remainsolid. It is a good time for businesses with ambition to work with PEs to consolidatetheir domestic and regional position.”


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• In 1Q17, a total of US$2.0b was invested in 28 deals,similar to the activity saw in 4Q16, which recordedcapital investment of US$2.0b across 30 deals.

• The total investment in 1Q17 was higher compared to1Q16 where a total of US$821m was invested across27 deals.

• The increase in 1Q2017, which mainly due to theprivatization of ARA Asset Management involvingWarburg Pincus. Other deals include TPG Capital andGoldman’s investment in Airtrunk and Northstar’sacquisition of Singapore-listed precision machinedparts maker, Innovalues Ltd.

Figure 1: Investment activity

Figure 2: Investment activity excluding large deals

Note: Small = deal value less than US$20m, mid = deal value of US$20m-500m, large = deal value more than US$500mSource: Thomson One, Dealogic and Mergermarket

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Investments2


Table 1: Top investments in 1Q17

Investmentdate

Company Country Sector Value(US$m)

Acquirer / Investor

Mar 17 ARA Asset Management Ltd Singapore Real Estate 1,290.0 Warburg Pincus LLC, Avic Trust

Feb 17 Airtrunk Pte Ltd Singapore Technology 305.4 Goldman Sachs, TPG Capital

Mar 17 Innovalues Ltd Singapore Industrial 230.0 Northstar

Jan 17 Ednovation Pte Ltd Singapore Education Services 35.1 CDH Investments

Feb 17 ConnexionsAsia Pte Ltd Singapore Technology 25.0 Bioveda Capital Pte Ltd, EDB InvestmentsPte Ltd, NSI Ventures, BCG Digital Ventures

Source: Thomson One, Dealogic and Mergermarket


Exits3

Note: Small = deal value less than US$20m, mid = deal value of US$20-500m,large = deal value more than US$500m

Source: Thomson One, Dealogic and Mergermarket

Geophin GeorgePartnerTransaction Advisory ServicesErnst & Young Solutions LLP

“As stability returns to Southeast Asia, the exit window has opened. We expect to seestrong exit activity over the next two to three years, and PE funds are starting to plantheir exits ahead by 12-18 months in order to maximize value.”

• There remains limited disclosure around PE exits in theregion, with a number of deals going unreported andtherefore not captured by the analysis.

• Exit activity in 1Q17 saw 5 deals being completed. Thelargest deal was PRASAC Microfinance Institution Ltd(a Cambodian microlender) sale to Lanka ORIX Leasingfor US$186m.

• The other deal in the quarter was the sale of VietnamAustralian International School by Mekong Capital andMAJ Invest to TPG Capital.

• The average hold period for PE investments acrossSoutheast Asia is longer than what is seen globally asbusinesses and markets in this region are still in theirnascent stages.

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Figure 3: Exit activity


Source: Preqin

• In 2016, the number and size of the funds closed wasmuted compared with 2015. A total of US$2.3b wasraised compared to US$16.5b in FY15.

• In 1Q17, funds raised increased to US$2.8b (withSoutheast Asia focus). The largest was the GatewayReal Estate Fund Asia-focused fund, which raisedcapital of US$1.3b.

• The total “dry powder’ is currently high for the Asia-Pacific region as KKR and TPG Capital have recentlyannounced on new multi-billion dollar Asia-Pacificfunds. For now, the focus is shifting towardinvestment and the deployment of this capital.

Fund-raising4

Figure 4: PE fund-raising with Southeast Asia focus

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China 8.6% 9.8% 11.3% 7.8%

India 6.1% 6.7% 8.1% 6.7%

Indonesia 1.0% 4.7% 5.7% 5.5%

Malaysia 5.0% 4.8% 4.5% 5.3%

Philippines 3.6% 4.6% 5.0% 5.9%

Thailand 0.9% 5.5% 3.8% 2.9%

Vietnam 7.0% 6.9% 6.3% 5.9%

1995-2000 2000-2005 2005-2010 2010-2015

Figure 5: Average 5-year GDP growth over past two decades (%)

• For two decades, emerging Asia has been a source ofexponential growth for PE firms. As countriesdemonstrated unprecedented growth at two, three,even five times that of developed markets, investorsflocked to the region. Their unabashed goal: establishbeachheads across the region, and gain first-moveradvantage. Yet, profits still remain elusive.

• As the region evolves and matures, growth has slowedand competition has intensified. High levels of debt,weak and volatile currencies, slow progress oneconomic reforms, and, in some countries, corruptionand political instability, are impediments to betterperformance. Plunging commodities prices, linkedlargely to China’s pullback on infrastructure spending,also are weighing on the region.

• However, even at last year’s slower growth rates, Asiaaccounted for approximately two-thirds of the 3.1%growth in global gross domestic product. And whenChina’s US$10t economy expanded by “only” 6.9% in2015, the gain was bigger, in absolute terms, than theone recorded 10 years earlier when the country’s thenUS$1.7t economy grew by 11.4 %

• Asia’s burgeoning middle class continues to grow.According to an estimate from the OECD DevelopmentCenter, by 2030 Asia will account for 66% of theworld’s middle class, up from 28% in 2009. This,combined with the growing disposable income, willcontinue to create massive demand for consumergoods, especially since current penetration remainsfar below levels common in developed markets.

Asia slows, but still relevant. Time to refocus.

Source: IMF, World Bank, EY Analysis

Industry in focus:Consumer5


From “Show me the promise” to “Show me the money”

Scale matters• Companies that were betting on the past runaway

growth need to rethink the Asia story and embrace anew capital strategy that is more sustainable andfocused on driving profitability.

• Often, that will mean focusing on those markets,product categories, and service sectors where theyare among the top three in terms of market share.Because scale matters. History and economics showthat the top two or three market share leaders in agiven business typically capture about two-thirds ofthe available profits.

But market share is hard to win• Achieving scalability across an entire, diverse region

like Asia can be extraordinarily challenging – requirestailoring products to meet local demands, tastes, andlocal shopping habits.

• Local adaptation demands substantial investment notonly in research and development but also inidentifying, hiring, and nurturing local managerialtalent who understand local market conditions. Manylocal companies are winning the ground war overmultinationals owing to their visceral understanding oftheir market and their customers, and willingness tooperate at lower profit margins, and they seldom seekto compete across the entire region.

Depth over breadth - the “right to win”• All this makes it imperative that investors and

companies focus on depth before breadth. Country orcategory depth is critical to dominating trade in Asianeconomies, where channel penetration is a significantdriver of consumer sales.

• Companies with scale can win shelf space by workingwith the strongest distributors, investing more inadvertising and promotion, and having a strongersales force and better organized sales and supplychains. Subscale presence makes it difficult tocompete and hence unprofitable. One has to decide ifthey can build the necessary capabilities. If they can’t,then they have to exit.

• But emerging Asia is not a monolith. The challengebegins with figuring out exactly how and where shouldtheir capital and other resources be focused, andwhere to fall back. Political models, regulatoryregimes, cultural norms, consumer behaviors, anddistribution channels vary from one country to thenext, as does the maturity of each country’sinfrastructure.

• Assessing your right to win requires assessing theopportunity from multiple angles: the capabilities ofyour management team, your relative market share,your margins, your profitability, your route to market.Think carefully about where to create a model thatgives you the right to win.

Source: S&P Capital IQ, EY analysis

1.40

Ratio of large-cap EBITDA vs. small-cap EBITDA

For both consumer staples and discretionary

Figure 6: Comparison of average EBITDA margins for large-cap companies(yellow) vs. small-cap companies (gray)

EBITDA margin

23% 17%


Packaged foods (2015)

Color cosmetics (2014)

Executing a depth-over-breadth capital strategy

• Although a number of companies have begun transitioning toa depth-over-breadth capital strategy in Asia, it sometimeshas been done on a reactionary basis. Companies seeking amore measured approach may consider the following steps:

• Conduct a portfolio review, reassess a given market orcategory in terms of the size of the opportunity, growthdrivers, and the company’s ability to address these growthdrivers in the highest-value markets.

• Double down in priority countries by undertakingtransformative M&A and partnership deals to boost marketshare quickly. Organic growth can be slow, and harder toexecute. Done right, M&As and joint ventures can directlycatapult a company into the top three.

• Right-size go-to-market models depending on scale,category, channel configurations, and strategic visions.Key factors to be considered are impact on fixed costs andmargins, in-house distribution capabilities, scale withinchannels, identification of a reliable partner, as well asgovernance and control issues.

• Launch a large-scale cost-cutting initiative to jump-startpath to profitability. Under land-grab strategies targetingextraordinary growth, companies established Asianoperations with excess fat across the organization. Anhonest and critical zero-based budgeting exercise istherefore essential.

• Reorganize to emphasize country over category. Inemerging Asia, volumes in individual categories are oftensmall. Hence, it may be easier to achieve distribution scaleacross a range of categories within a single country ratherthan across a single category.

• Plan a path to exit, and limit losses. Where marketleadership and profitability are not realistic, investorssimply need to swallow their medicine shut downoperations, write off the investment and move on.

Siddharth PathakPartnerTransaction Advisory ServicesErnst & Young Solutions LLP

“Asia today is not the emerging Asia from ten, or even five, years ago. Companiesthat have yet to see Asia’s promise cascade to the bottom line must determine theirpath to profitability. Depth, not breadth, will win the day.”

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L'Oréal EstéeLauder

Shiseido Revlon

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Nestlé Unilever Danone Abbott

Figure 7: Number of countries in APACwhere brand ranks among top 3 by marketshare

Companies struggle tomaintain dominanceacross markets

Markets have differentdynamics, no one-size-fits-all strategy

Note: APAC markets include Thailand, Indonesia, Malaysia,Philippines, Singapore, Vietnam, China and India

Source: Company data, BNP Paribas, UBS, MarketLine,Euromonitor, EY analysis


• We operate in the age of big data, which posessignificant opportunities and challenges for businessesglobally. Data that is misunderstood, misanalyzed orsimply overlooked, creates unmeasured risk andmissed opportunity.

• The exponential growth in the volume and variety ofinformation has far outpaced most organizations'ability to maintain their reliability and integrity. Theimplications are further magnified in a new era ofstakeholder scrutiny and regulatory expectations.

• Finding greater clarity at optimized speed amongincreasing complexity is critical for business decision-makers. In the PE world, analyzing complex data setsand making quick decisions are particularly important,given the record amounts of available capital and thegrowing competition for quality assets.

• In the EY Global Corporate Divestment Study 2017,44% of PE executives indicate that a lack of confidencein information is the most significant factor thatcauses a PE firm to reduce its offer or walk away froma deal. The survey also found that 49% believe accessto meaningful data is the biggest portfolio reviewchallenge.

• As application of data analytics is gathering pace, EYhas a broad spectrum of advanced analyticscapabilities to assist PE firms in addressing complexissues that arises in deal making, portfoliomanagement and PE value creation.

The search for clarity in an age of complexity

Data analyticsfor PE6

Data analytics for PE

Deal making(from conception to completion)

• Gain greater market insightsfrom large data sets i.e., businesstrends, target screening andbenchmarking.

• Leverage analytics for due-diligence (both financial andcommercial) to provide greaterinsights and identify potentialissues quickly.

Portfolio management and review

• Conduct statistical andquantitative analysis across aportfolio through a robustscenario development – allowingbetter decision making in thecapital allocation process i.e.,when to invest capital, when tosell businesses, when to be fix orfurther invested in.

Value creation in portfoliocompanies

• Conduct statistical andquantitative analysis on portfoliocompanies to identify potentialvalue creation from operationalactivities e.g., logistics, supplychain, sales productivity.

• Assist in addressing issues suchas buy or build? Is organic growthenough to keep pace withchange?


How can EY analytics assist your organization?

Issues EY analytic tools

Data analysis andvisualization for:• Transaction

analytics(financial andcommercialdiligence)

• Financial andoperationalbenchmarking

• Target screening

• With a greater number ofdata sets and sourcesavailable to analyze and theneed for rapid insight, thetraditional tables andnumbers methods ofanalysis can be slower atdeducing the key messages,and even risk missing themaltogether.

• Companies often spendsignificant time on basicanalysis before realizingoutput is insignificant orinadequate.

• EY advisors are equipped with industry standard self-service business intelligence software in order to allowmore efficient and effective analysis for decision-making.

• Using these tools our advisors are capable of rapidlyconstructing visualizations and drill downs that providea better picture of the data to identify key messages,key issues, anomalies and patterns.

• Further insights provided via real-time access to latestfinancial and operational metrics across industries,regions and business functions.

Improvement • Identify value-enhancingstrategies that continuouslyimprove performanceacross the portfolio andmanage risk, given capital,timing, and otherconstraints can be achallenge.

• EY uses a dynamic tool to deliver objective value andanalysis through robust scenario development andmodeling and valuation techniques.

• It is a purpose-built tool that drives discussion fromstrategy formation and quantitative analysis throughexecution of the various selected options. It can also beapplied to post-close and stand-alone operations.

Social mediaanalytics

• A company’s marketposition is difficult to assessbut extremely important forvalue assessment.

• The EY proprietary social media analytics platformdraws quantitative insights from billions ofconversations on social media, and provides actionableinsight actionable insights throughout the transactionlife cycle, from pre-deal diagnostics through diligenceand post-close.

Carve-out financialplanning andreporting

• Often longer time isrequired for preparing carveout financials due to needfor multiple iterations,maintaining data integrityand understanding changesto the numbers.

• The EY financial reporting and analysis tool is able toassist companies to make strategic plans, streamline thedivestiture reporting and audit process, and developanalytics for better-informed transaction decisions.

• The tool improves data integrity, adds efficiency, andenhances decision making through tailor-made reports.It is a leading-class platform for speed and scalability.


How we have transformed our approach to transactions?

Teh Seng LeongPartnerTransaction Advisory ServicesErnst & Young Solutions LLP

“Analytics brings clarity to voluminous unstructured data, cutting through the fog andderiving conclusions at greater speeds than before.”

EY experience in Asean EY assistance Outcome and benefits

Case 1:A consortium of PEs invested in ane-commerce start-up.

The consortium of PEs required in-depth commercial, IT and financialdue diligence to support thebusiness valuation, particularlyaround productivity (transactionsper unit) and customer usage.

EY employed data analyticsfor the following:• Test for fraud based on

agreed metrics• Identify customer usage

pattern – by day of week,region, service, frequencyand payment mode

• Identify unit productivitytrends – by day of week,region, service

• The transaction-level data enabledrobust reconciliations between financialand operational metrics, thus providingbetter insights on the business keyperformance indicators beyond purelyfinancial reporting.

• The bespoke analysis is customized forthe specific transaction dynamics anddata availability to identify, at a highlygranular level, the drivers of profitablegrowth and the impact of past strategicdecisions on the businesses historicaldevelopment.

• The ability to nimbly change how data is“sliced-and-diced” allowed our client toexplore hypotheses and tweak theirvaluation model to factor in multiplescenarios.

Case 2:A global leading manufacturerconsidered a regional strategy tobuy back its distributorship forcertain key Asean markets.

The incumbent regional soledistributor also distributed third-party brands that are not part of thetransaction.

EY employed data analyticsfor the following:• Identify growth drivers

(store or products), whichculminated in identifyingthat certain key drivers ofgrowth that were notentirely visible at the outset

• Assess integrity of the proforma carved-out financialsprepared by the Target

• EY identified missing sales records thatwere not included in the target-preparedpro forma carved-out financials andprovided client with more granularmonthly carved-out financials bycollections and customers.

• In-depth analysis allowed deeper insightsto the product life cycle, including thegradual price reduction of new collectionrelease over time, customerconcentration and the seasonality of thebusiness.


► Focus: provide value creationservices across the PE investmentlife cycle

► Dedicated PE experience:dedicated teams comprising formerPE operating partners, seasonedoperating executives andmanagement consultants

► Broad functional knowledge:capabilities in PE fund structuring,portfolio audit, strategy, M&A andall core operating functions;experience in revenueenhancement, cost reduction,human capital andchange management.

► Deep sector experience: primaryfocus in oil and gas, consumer,industrial, and health care; ability totap into sub-sector professionals

► Accelerated approach: customizedapproach that is highly responsiveand provides accelerated realizationof benefits

► Global capabilities: dedicatedteams that has extensive cross-border experience with access tomore than 30,000 consultantsoperating in 140 countries withdeep industry and functional know-how

Our capabilities

EY PE team comprises experiencedprofessionals focused on PE and issupported by our deep sector andfunctional professionals around theworld.

EY PE team

Privateequityfund

► Performanceimprovement

► Sales forceeffectiveness

► Businessintelligence

► Finance► Human resources► Supply chain► IT transformation► Risk

► Lead advisory► Commercial advisory► Financial diligence► Operational diligence► IT diligence► Carve-out► Integration

► Restructuring► Real estate► Divestiture► Valuation and

business modeling► Operational improvement

Our PE serviceofferings7


EY ContactsService line contactsM&A

Luke [email protected]

+65 6309 8094

Corporate Finance Strategy

Karambir [email protected]

+65 6309 8089

Transaction Support

Seng Leong [email protected]

+62 21 5289 5007

Transaction Tax

Darryl [email protected]

+65 6309 6800

Operational Due Diligence

Sriram [email protected]

+65 6309 6214

Valuation & Business Modelling

Andre [email protected]

+65 6309 6214

Country contactsIndonesia

David [email protected]

+62 21 5289 5025

Sahala [email protected]

+62 21 5289 5210

Hertanu [email protected]

+62 21 5289 5684

Malaysia

George [email protected]

+60 3 7495 8700

Preman [email protected]

+60 3 7495 7811

Philippines and Guam

Renato [email protected]

+63 2 891 0307

Singapore

Purandar [email protected]

+65 6309 6560

Vikram [email protected]

+65 6309 8809

Thailand

Ratana [email protected]

+66 2 264 0777

Piyanuch [email protected]

+66 2 264 9090

Vietnam

Toan Quoc [email protected]

+84 8 3824 5252

Du Vinh [email protected]

+84 8 3824 5252

Global contactGlobal

Herb W [email protected]

+1 212 773 6202

Sector contactsConsumer Products Financial Services

Geophin [email protected]

+65 6309 8168

Stuart [email protected]

+65 6309 6720

Health care Infrastructure

Abhay [email protected]

+65 6309 6151

Lynn [email protected]

+65 6309 6688

Oil & Gas Power & Utilities

Sanjeev [email protected]

+65 6309 8688

Gilles [email protected]

+65 6309 6208

Real Estate TMT

Benedict [email protected]

+65 6309 8786

Joongshik [email protected]

+65 6309 8078


EY | Assurance | Tax | Transactions | Advisory

About EY

EY is a global leader in assurance, tax, transactionand advisory services. The insights and qualityservices we deliver help build trust and confidencein the capital markets and in economies the worldover. We develop outstanding leaders who team todeliver on our promises to all of our stakeholders.In so doing, we play a critical role in building abetter working world for our people, for our clientsand for our communities.

EY refers to the global organization, and mayrefer to one or more, of the member firms ofErnst & Young Global Limited, each of which is aseparate legal entity. Ernst & Young GlobalLimited, a UK company limited by guarantee,does not provide services to clients. For moreinformation about our organization, please visitey.com.

About EY’s Transaction Advisory Services

How you manage your capital agenda today willdefine your competitive position tomorrow. Wework with clients to create social and economicvalue by helping them make better, more-informeddecisions about strategically managing capital andtransactions in fast changing-markets. Whetheryou're preserving, optimizing, raising or investingcapital, EY’s Transaction Advisory Servicescombine a unique set of skills, insight andexperience to deliver focused advice. We help youdrive competitive advantage and increased returnsthrough improved decisions across all aspects ofyour capital agenda

© 2017 EYGM Limited.All Rights Reserved.

EYG no. 04448-174Gbl

ED None

This material has been prepared for general informationalpurposes only and is not intended to be relied upon as accounting,tax or other professional advice. Please refer to your advisorsfor specific advice.

The views of third parties set out in this publication are notnecessarily the views of the global EY organization or its memberfirms. Moreover, they should be seen in the context of the timethey were made.

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private equity briefing: southeast asia – july 2017 · private equity briefing: sea 2 ... center,...

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