Southeast Asia has become a region of high interest for private equity (PE) investors. Growing economies with a young demographic and nascent booming technological ecosystems create a suitable environment for PE firms. The region has also developed a deep talent pool hungry to make its mark.
In 2022 alone, USD 34.1 billion was invested by PE and VC firms, setting a new record. While private equity in Southeast Asia may have a promising future, vast challenges are also present.
Let’s look at five private equity trends in Southeast Asia to provide an overview of the current landscape.
Rise of alternative asset classes
While the bulk of PE investments are in traditional asset classes, a recent study by Bain & Company has observed an increasing interest in alternative asset classes. In particular, PE firms have been investing in global infrastructure funds as well as in private credit.
The interest in developing infrastructure in the region has been growing for over a decade. A landmark event was the establishment of the ASEAN Infrastructure Fund in 2011, administered by the Asian Development Bank. In response to the region’s growing environmental concerns, two new areas of investment were created within the fund: the ASEAN Catalytic Green Finance Facility and the Inclusive Finance Facility.
According to McKinsey, more LPs indicated a preference for investing in infrastructure funds and private credit.
Focus on healthcare, fintech, and consumer products
Private equity investments are prone to have their favourite sectors. The sectors currently experiencing the highest levels of interest are healthcare, fintech, and consumer products.
Within healthcare, several large deals have taken place in the provider space. In 2023, investments in this sector commanded the highest share of total deal value at 24%. The previous record was in 2019 when it received a 22% share.
The overall internet and technology space is experiencing a slowdown. However, the fintech and insurtech spaces seem immune from the downturn. Between 2018 and 2023, the overall PE investments in fintech have grown at a CAGR of 12%.
As mentioned earlier, we can see favourable demographics and rising GDP per capita in Southeast Asia. Bain & Company predicts this will likely lead to significant growth in PE deals in the consumption space.
A return to active dealmaking
PE firms have held on to large cash reserves in recent years as they await the next big opportunities. Now, the industry is poised to start putting its capital to work and changing the shape of Southeast Asia as a PE investment destination.
There is still a lot of untapped potential in the region compared to the rest of Asia-Pacific. The percentage of PE investments in comparison to the overall GDP remains relatively low. This indicates that PE firms have a long runway and significant opportunities for investments.
Indonesia is becoming a budding hotspot
While Singapore has traditionally been the flag-bearer of investment opportunities in the region, Indonesia has increasingly captured attention over the past decade. The world’s fourth most populous nation has been receiving investments from other countries including Japan, South Korea, and the US.
The country has benefited from several tailwinds characteristic of the region as a whole. The country’s market size is second only to India within the entire Asia-Pacific.
A unique aspect of startup culture within the country is the influence of large conglomerates. A large number of highly diversified conglomerates dominate Indonesia’s business sector. Due to an established corporate structure, these conglomerates find it challenging to incubate innovation from within.
Hence, they have the incentive to invest in startups to find new growth opportunities. This synergy between startups and conglomerates can help the nation build an increasingly sophisticated ecosystem in which foreign PE firms can invest.
Opportunity in growth-stage funding
Only a relatively low number of growth-stage funding deals are currently being closed in the region. Additionally, the number of large deals is staggeringly few. Only 9% of the deals had an over USD 25 million ticket size.
Even though there is a significantly large pipeline of mature startups in the region, there is a lack of venture firms which support pre-IPO growth. While in more developed economies, funding support is available for all stages of a startup’s lifecycle, there is a notable gap in the market in Southeast Asia.
Currently, several private equity trends are reshaping the industry globally. In ASEAN, foreign PE firms must tackle an overarching challenge: the diverse regulatory framework and ecosystem within each country. As private equity in Southeast Asia evolves and develops, the market will likely become increasingly sophisticated, starting a virtuous cycle that benefits investors and consumers.