8th July 2020 – Private equity (PE) and venture capital (VC) investment activity across Southeast Asia (SEA) was slow in 1Q2020 amid the COVID-19 pandemic. A total of 141 deals worth US$1.4b were announced, a dip of 9% and 65% in aggregated volume and value respectively, compared with the same period last year. Exit activity remained largely muted. Announced PE and VC-backed exits saw a decline from 9 deals in Q1 2019 to 6 deals in Q1 2020.

This is according to the EY Private equity briefing: Southeast Asia (June 2020) report, which provides a roundup of the PE and VC deals along with capital activities across major sectors in the quarter. The report also found that dry powder reached record levels of US$439b by mid of May 2020.

Luke Pais, EY Asean M&A and Private Equity Leader says: “There is a lot of uncertainty in the market. However, fund managers are now more prepared to encounter a recession than they were a decade ago. While the full-blown impact of the COVID-19 pandemic is yet to be seen with disruption continuing to unfold, we strongly believe that the industry is well-positioned to adapt and respond. We expect activity to pick up pace by the last quarter of 2020.”

PE funds focusing on immediate challenges with an eye on the future

According to the report, Q2 2020 is expected to be a slow quarter as well. Over the last 8-12 weeks, PE funds have focused on dealing with issues, such as liquidity, protecting their people, accessing incentives and ensuring that short-term adjustments are made to ensure the business has adequate resources and support to weather the storm.

Having addressed the short-term issues, PE funds are increasingly pivoting to deal with issues such as resumption of trading and making operating adjustments to the business, with a focus on what lies beyond.

The top five focus areas that PE firms are working with their portfolio companies include:

• Liquidity management: For many portfolio companies, a combination of immediate higher cash needs and limited ability to fund them can lead to liquidity shortfalls. PE firms are helping their portfolio companies assess the short- and medium-term cash flow needs to ensure sustainability from a cash perspective.
• Strategy and business model validation: PE firms are working with portfolio companies to understand if the strategy and business model need to be refreshed given the changes in the operating environment.
• Supply chain assessment: PE firms are conducting supply chain intelligence and analytics exercises on their portfolio companies to help them optimize and perform integrated planning and supplier management.
• Tax impact: PE firms are seeking to understand the tax implications of the downturn and the full range of legislative responses across the world. In some cases, PE firms are acquiring the debt of their own portfolio companies, which can trigger tax consequences.
• Value creation with strong focus on technology or digital: PE firms are helping management to frame issues to help them make smart and fast decisions around people, facilities, operating arrangements and technology. There is an emphasis on the use of technology across the different aspects of the business.

Pais adds: “Having taken stock of the liquidity position and scenario planning for their portfolio over the past couple of months, PE funds are also now actively assessing new opportunities. There is a high level of liquidity with the funds and as economies emerge from lockdown, corporates and entrepreneurs will need capital solutions. We expect to see activity in the areas of structured finance, public to private, capital recycling, non-core divestments, and sector and segment consolidation.”