Bain & Co, a global management consulting firm, has released its third annual “Asia-Pacific Private Equity Report”. Its highlights follow.

lDeal value rose by a staggering 44 per cent last year, setting an all-time record of $125 billion – about twice the average of the previous five years. After surging 194 per cent in 2014 (following a worrisome two-year decline), deal value in greater China grew another 56 per cent last year to $69 billion, accounting for about half the region’s total. India and South Korea also posted record deal flow, while activity ebbed in Southeast Asia and Japan.

lDeal count shot up 34 per cent to 955, breaking through the 900 mark for the first time ever. For the second year in a row, greater China (the mainland, Hong Kong and Taiwan) led the charge in both value and deal count.

lAverage deal size set a new record, ballooning to $131 million, 45 per cent higher than the five-year average.

lAcross the region, exit activity at $88 billion remained robust, even in the face of extreme volatility in the equity markets. Greater China drove more than half of the exit value in the region, spurred by several large-scale initial public offerings.

“Last year was an exceptional year for deal-making. By comparison, 2016 will likely be much softer,” said Suvir Varma, who leads Bain’s private equity practice in the Asia-Pacific region. “As the macro story across the region deteriorates, PE is wading into unfamiliar territory – a slower growth environment that will make it much more difficult to find good companies, improve their performance and exit them at market-beating returns.”

2015 PE trends

Bain found that a surge in mega-deals (larger than $1 billion in value), particularly those in China and South Korea, accounted for 43 per cent of total transaction value across the region, more than double the value of a year earlier. Behind this surge were:

lPublic-to-private buyouts, which soared to $17 billion in value – more than three times the five-year average – and made up 14 per cent of total PE deal value in 2015.

lStrong activity among large institutional investors and sovereign wealth funds, which have long shown keen interest in the Asia-Pacific PE market. SWFs and institutional investors co-invested with traditional PE funds in 74 transactions representing $36 billion in value last year.

In terms of sector trends, the Internet sector was by far the hottest area of focus in the Asia-Pacific region in 2015. Companies offering Internet-based solutions are exploding, generating a groundswell of interest among PE funds looking for growth. Investors across the region plunged a record $36 billion into 371 Internet-related deals in 2015 and another $15 billion in 141 technology companies.

The opportunities ahead

Of particular note, this year’s report includes results from a Bain survey of 125 private-equity executives in the Asia-Pacific region on their three-to-five-year industry outlook.

Respondents point to China’s economic deceleration as the true test for the PE industry’s resilience and creativity in the coming year. Market turbulence in the Asia-Pacific region, characterised by slower growth, new economic drivers and greater regulatory uncertainty, will also heavily influence the current PE landscape and challenge the ability of general partners (GPs) to decrease their risk while still realising strong returns.

“How the PE market unfolds will differ based on where in Asia-Pacific one is looking,” Varma said. “The stories won’t be the same across geographies and sectors, which will require funds to abandon their one-size-fits-all strategies to identify profitable opportunities.”

As volatility and competition mount across the region, Bain’s survey revealed an increasing number of GPs reacting to the changing landscape in a variety of ways:

lBroadening focus – A trend towards geographic and asset-class expansion has been building for several years as firms try to expand their scope to limit their risks. The Asia-Pacific region made up 44 per cent of closed funds between 2013 and 2015, up from 23 per cent between 2009 and 2012. About a third of the GPs in the survey said they invested in non-traditional asset classes and 45 per cent indicated they would be broadening their scope to include such investments over the next five years. As appealing as diversification might seem in an increasingly challenging environment, however, it can also pose a high degree of risk, especially for asset-class expansion, which typically offers fewer synergies.

lCo-investing with limited partners (LPs)- Co-investments are on the rise in the Asia-Pacific region and unlikely to go away. Last year, co-investment deals made up nearly $36 billion of the total $44-billion deal value that involved LPs – a spike from just about a third of 2014’s $12 -billion value. Nearly 95 per cent of GPs expect the trend to continue or stay broadly the same in 2016.

lControl – Buyout deals are gaining steam in the region as PE firms seek more control over portfolio companies. According to Bain’s survey, 75 per cent of GPs said they expect buyouts will make up more than 80 per cent of their portfolios over the next two or three years versus 50 per cent for growth deals. In parallel, GPs also expressed their intent to gain more control, even when they sign growth deals with minority stakes. PE funds expect that almost 50 per cent of the portfolio companies they acquire with a minority stake will give them the ability to participate in critical company decisions within the next two to three years, versus 39 per cent today.

lActivism – As growth ebbs, it will become proportionally harder to create value without making significant changes to a portfolio company’s operations, management team and strategy. The power to exert such influence has often been missing in the Asia-Pacific region. Although 58 per cent of the GPs in the survey said they put in place robust value-creation plans for 80 per cent of their portfolio companies, only 14 per cent said they believe they are executing successfully on those plans.

Thriving amid uncertainty

Looking at the top funds in a difficult macro environment, Bain finds that the winners in the Asia-Pacific region share three broad characteristics:

lThey have storm-proofed their portfolios by dialling up their focus on portfolio activism, investing heavily in the people and capabilities needed to maximise the value of their highest-potential companies and generate the most compelling growth stories upon exit.

lThey are sourcing from a position of strength by targeting the most resilient sectors, sharpening due diligence to anticipate potential downside risk, and devising early, robust strategies for margin improvement, incremental revenue growth and exit planning.

lThey are reorganising inter-nally to devote more talent and resources to fixing companies. |They are also adding depth to in-vestment-committee processes |by including specialists and others |in the portfolio-review process, while creating stringent guidelines to focus resources where it matters most.

“PE funds will need to be well equipped to thrive in tumultuous times,” Varma said.

“The most successful of the pack, regardless of geography, share one key trait: They quickly transition from thinking as acquirers to acting like value creators. The clarity of their insights, the quality of their due diligence, and the discipline with which they price assets all represent the first steps in mobilising the right value-creation strategy and executing on it.”

Pongpun Gearaviriyapun, director-general of the Business Development Department, said yesterday that new enterprises were encouraged to set up by the government’s measures to promote investment, the special economic zones and healthy tourism growth.

The department’s measures to facilitate start-ups have also supported business formation. The expectation that gross domestic product could expand by 3.3 per cent this year has also spurred the establishment of more companies, she claimed.

The department expects about 60,000-65,000 companies to be born this year.

Some risks remain

In the first quarter of this year, new registered companies increased by 1 per cent from the same quarter last year to 17,523, but were up sharply by 35 per cent from the final quarter of 2015.

There are still some risks weighing on enterprises’ decision to expand, including the drought, sluggish exports and fluctuating oil prices, as those factors could erode purchasing power.

Initial investment capital last month surged 70 per cent year on year to Bt27.3 billion.

In the first quarter of this year, total initial investment increased 57 per cent year on year to Bt77.52 billion.

Last month saw 1,183 companies shutting down, up only 0.2 per cent from a year ago but 28 per cent from February.

In the first three months of this year, business closures dropped 3 per cent year on year to 3,574.

Most of the new companies are engaged in construction, property development, machinery wholesaling, restaurants and food retailing, and consulting.

More than 631,195 companies are actively operating in the country, of which 1,118 are public companies.

Export value dropped by 0.2 per cent in 2013, 0.3 per cent in 2014 and 5.6 per cent last year.

CIMBT has cut its GDP growth forecast for this year from 3 per cent to 2.7 per cent, and predicts 2.8-per-cent growth next year.

These figures are based on the likelihood of export value this year dropping by another 4 per cent, and by 1.9 per cent in 2017.

The continuing export slump has combined with the unclear schedule for a return to democracy to damage investor confidence.

While the government has implemented some incentive measures, they have fallen short of investors’ hopes, Amonthep said.

He said the incentives aimed and attracting investment in the special economic zones and industrial clusters had failed to impress investors because of the barriers that remain, including unattractive land prices and labour costs. The SEZs are also located far from the country’s ports, which means high transport costs.

To encourage investment to boost GDP growth in the medium term, the government must strive to build confidence, he said.

This means providing clarity on political affairs after the constitutional referendum and speeding up spending on mega-projects, including showing leadership on the public-private partnerships.

The low level of public debt provides room for using fiscal policy to enhance investment, so the government should take on a more proactive role as long as the private sector is not ready yet to do so.

However, Amonthep warned against relying on low interest rates to stimulate investment. The fact is that this mechanism will not have much positive effect on loan growth, while putting the country at risk of a liquidity trap in the future.

CIMBT has suggested that the government launch consumption stimulus measures for middle-to-upper-income consumers.

Thailand’s economic growth is expected to moderate to 2.5 per cent in 2016, from 2.8 per cent in 2015, according to the World Bank’s “East Asia and Pacific Economic Update”.

Boosting the economic outlook in 2016-2017 will be the timely implementation of public infrastructure projects, such as railway dual-tracking and upgrading.

Nevertheless, three main economic challenges are highlighted, including China’s economic condition and domestic political instability.

The World Bank said that in the case of a hard landing for the Chinese economy, accompanied by global financial turmoil, Thailand would be mostly affected through the trade and financial channels, as China represents 12 per cent of the Kingdom’s exports and 8 per cent of foreign direct investment. Ample monetary and fiscal buffers could alleviate the impacts, though.

The second risk is that of a return to the political gridlock seen in the years prior to the current military-led regime’s tenure, if ongoing political reforms do not satisfy civic society at large.

“Such a scenario could lead to renewed street protests, incapacitate key government institutions and weigh on consumer and investor confidence,” the bank said.

Finally, as the Thai population is ageing rapidly – the share of working-age population in the total population could start to decline this year – demographic dividends will no longer contribute to growth and inclusiveness in the same manner as before.

Pockets of poverty increasingly concentrate in the lagging Northeast, North and deep South, and among the households residing in remote areas and with limited means to support themselves, including elderly households.

Thailand’s economic growth rate this year is near the bottom among Southeast Asian economies. The Philippines and Vietnam are expected to show the strongest prospects this year among Southeast Asian nations, with anticipated growth of more than 6 per cent.

In Indonesia, gross domestic product is forecast to grow by 5.1 per cent in 2016 and 5.3 per cent in 2017, contingent on the success of recent reforms and implementation of an ambitious public investment programme.

According to the report, several small economies, including Laos, Mongolia and Papua New Guinea, will continue to be affected by low commodity prices and weak external demand.

Cambodia’s annual growth will be slightly below 7 per cent from 2016-18, reflecting weaker prices for agricultural commodities, constrained garment exports, and moderating growth in tourism.

The large Southeast Asian economies are expected to drive the GDP growth rate in developing countries in East Asia between this year and 2018. Compared with 4.7 per cent in 2015, the growth rate excluding China is expected to rise to 4.8 per cent in 2016 and 4.9 per cent in 2017-18.

East Asia

Including China, growth in developing East Asia is expected to ease from 6.5 per cent in 2015 to 6.3 per cent in 2016 and 6.2 per cent in 2017-18. The forecast reflects China’s gradual shift to slower, more sustainable growth, expected to be 6.7 per cent in 2016 and 6.5 per cent in 2017, compared with 6.9 per cent in 2015.

However, the outlook for individual countries varies, depending on their trade and financial relationships with high-income economies and China, as well as their dependence on commodity exports.

“Developing East Asia and Pacific continues to contribute strongly to global growth. The region accounted for almost two-fifths of global growth in 2015, more than twice the combined contribution of all other developing regions,” said Victoria Kwakwa, incoming World Bank East Asia and Pacific regional vice president.