Private equity briefing: Southeast Asia – November 2017 · · 2018-01-09substantial component...

1Private equity briefing: SEA

Private equity briefing: Southeast Asia November 2017


This quarterly briefing offers you a roundup of the private equity deals and capital activities across major sectors in the quarter and trends that are shaping investment decisions today.

It distills the perspectives of our teams of subject-matter professionals in the region into pertinent insights to keep you ahead in navigating the private equity landscape.


Contents4 5 7 8 12

1Outlook

2Investments

3Exits

4Fundraising

6Value creation through operational transformation

19

7Our PEservice offerings

9

5Country in focus: Malaysia


2Q17 private equity (PE) deal activity declined, however PE interest levels and dry powder remain high in the region.

The overall value of PE deals completed in 2Q17 across Southeast Asia was US$1.23b across the 24 deals closed. The quarter’s activity had slipped from the previous quarter, which saw total deal values at US$1.97b across 28 deals. Singapore deals accounted for approximately 50% of the PE activity in 2Q17, led by the US$550m fund raising by SEA Limited (formerly known as Garena Interactive Holding Ltd).

In this issue, we share our approach on value creation though operational transformation. This has become ever more important given the entry multiples and relatively sluggish business environment in the region over the last few years.We believe this will be a significant lever for PE returns over the next cycle.

We also feature Malaysia as the ‘country in focus’ for this issue of the newsletter. Malaysia has been exhibiting solid fundamentals as a market to become a PE dealmaking hotspot. Despite challenges affecting the region and country-specific issues, Malaysia-related M&A activity was still resilient in 2016. We believe there is value to be had in this market and a number of hidden gems.

Outlook1

“Given the level of dry powder in the region, we expect PE deal flow to intensify over the next few quarters. The markets have reached a greater point of stability after a fairly volatile period over the last two years and a number of sectors present attractive entry opportunities.”

Luke PaisPartnerAsean LeaderM&A and Private EquityErnst & Young Corporate Finance Pte Ltd


• In 2Q17, a total of US$900m was invested across 22 deals, a decrease compared to 1Q17, which recorded capital investment of US$1.97b across 28 deals.

• The total investment in 2Q17 was much higher compared to 2Q16 where a total of US$377m was invested across 25 deals.

• The largest deal in 2Q17 is SEA Limited’s US$550m fund raising in Singapore. Other deals include Proterra’s investment in FKS Food & Agri and KKR’s investment Masan Group.

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

Investments2

0

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3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

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value

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m)

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m)

Small Mid Deal count


Table 1: top investments in 2Q17

Investment date

Company Country Sector Value (US$m)

Acquirer / Investor

May 17 FKS Food & Agri Pte. Ltd. Indonesia Food 100 Proterra Investment Partners

May 17 SEA Limited (formerly known as Garena) Singapore Technology 550

Farallon Capital Management LLC, HillhouseCapital Management Ltd, Global Digital Prima PT

Apr 17 Masan Group Corp Vietnam Diversified 250 KKR & Co LP

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


Geophin GeorgePartnerTransaction Advisory Services Ernst & Young Solutions LLP

“We expect to see strong exit activity over the next two to three years, and PE funds are starting to plan their exits ahead by 12-18 months in order to maximize value.”

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

• 2Q17 saw two exits being completed. The largest deal was secondary sales in SPI Technologies to Partners Group for US$330m.

• 2Q16 and 1Q17 saw exits of US$1.0b and US$254m across two and give deals respectively

0

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3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17

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l cou

nt

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l val

ue U

S$m

Small Mid Large Deal count

Figure 3: exit activity



Fundraising4

Figure 4: PE fundraising with Southeast Asia focus

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Funds raised Fund counts

• Fundraising started off strongly in 2017, where a total of US$2.8b was raised in three deals in 1Q17. While the value of funds raised in the following 2Q17 fell to US$1b, it was still significantly higher than the US$371m raised in 2Q16.

• PE fundraising has recently been on the rise, with more funds raised in 1Q17 alone (US$2.8b) compared to a total of US$2.3b raised across the entire year 2016. Southeast Asia-focused fundraising has been active as the region remains one of the higher growth regions in the world.


Amid the headwinds, the fundamentals underpinning the Malaysian market justify its ability to become a PE dealmaking hotspot.

Source: Oxford Economics, Frost and Sullivan, Department of Statistics Malaysia and IMD

• Malaysia's real GDP growth is expected to rise by 4.3-4.8% in 2017, after seeing gains of 4.2% in 2016. This is driven by continued private consumption and investment, as well as public infrastructure projects and commodity-related investments.

• Malaysia currently ranks 11th out of 125 countries assessed in the Venture Capital & Private Equity Country Attractiveness Index by IESE, which measures investor-focused indicators such as economic activity, depth of the capital market, level of investor protection and corporate governance.

• Rapid urbanization and a swelling middle class (which made up 49% of the population, based on 2016 data) are poised to propel consumer spending on an upward trajectory, leading to the creation of investment opportunities in organized retail, consumer products, health care, education, transportation and telecommunications.

• Despite the recent financial volatility, the weakening of the ringgit has improved the price competitiveness and relative valuation of potential Malaysian targets.

George KoshyPartner and HeadTransaction Advisory Services, MalaysiaErnst & Young LLP

Figure 5: Malaysia’s PE scene offers a promising value proposition

“Set against a promising background, it is anticipated that the PE sector will contribute a substantial component of the capital-raising pipeline for growth stage companies.”

Country in focus:Malaysia5

528 580 626 672 715

1,0191,106 1,158

1,2301,298

71%

72%

73%

74%

75%

76%

0

200

400

600

800

1,000

1,200

1,400

1,600

2013 2014 2015 2016 2017E

Consumer spending (US$b) GDP (USD$b)

Urbanisation rate (%)


Funds raised in the last 10 years

US$3,740m US$875m US$680m US$190m US$150m

Estimated dry powder US$322m US$232m Not available US$13m US$74m

No. of portfolio companies

54 18 14 6-10 31

Typical investment size US$30-250m US$10-50m US$10m and above US$10-25m Not available

• Consistent with the trend observed across Malaysia’s PE funds landscape, dry power of Malaysia based funds is estimated to be approximately 30% of total AUM. While dry powder and AUM declined in 2016, it is believed that general partners have adequate capital resources to hunt for deals across the region.

Final close

Fund Fund manager

Size(US$m)

April 2016*

ASEAN Industrial Growth Fund (AIGF)

CIMB Private Equity

200*

Sept2016* Navis Malaysia Fund I Navis

Capital 170*

Dec 2016 Creador III Creador 415

Source: Preqin, S&P Capital IQ, Xeraya Capital

* Fund value and date of final close is estimated.

4.0

3.0

4.0

5.0 5.0 5.0

4.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013 2014 2015 2016

AuM Dry Powder(1H)

AUM

Overview of the Malaysian PE scene

Fundraising, assets under management (AUM) and dry powder

Total deal value for PE investments in Malaysia has increased in 2016, accounting for 37% of total

Southeast Asia deal value

PE deal volume in Malaysia continues to maintain at a high teens after a recovery from its dip in 2014

5989 95

13097

18

19 11

18

16

-

30

60

90

120

150

180

2012 2013 2014 2015 2016

Other SEA Malaysia

1.7 3.1

5.8

2.2 3.1

0.4

2.9

0.2

0.2

1.8

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2012 2013 2014 2015 2016

Other SEA Malaysia

Total deal value (US$b)

No. of closed deals

• Fundraising activity in Malaysia remained stable with the following funds successfully closing in 2016:

Total AUM (US$b)

Major Malaysia-based PE players


Enablers Considerations

• Malaysia’s incentives and initiatives towards a friendlier foreign investment environment:• Liberalized 45 subsectors to allow 100% foreign equity

participation in 2012• Signed investment guarantee agreements (IGAs) with

72 countries to facilitate free transfer of profits or capital and provide for enhanced investor protection

• Established tax incentives for the manufacturing and services sectors: • Pioneer Status (PS) • Investment Tax Allowance (ITA)

• Enhanced flexibility and liberalization of Security Commission’s (SC) regulatory framework:• Beginning 2015, PE firms in Malaysia may invest in

public listed companies.• Limited liability partnership structures are now

recognized by SC.

• Is majority a must?• There are many government-linked investors and

tightly-held family businesses that are good potential targets. However, they may not be willing to offer a control deal. Being flexible has proven to be strategic in such a relatively small deal market, and has benefited funds that are able to take a minority position.

• Malaysia-specific characteristics• It is critical for GPs to cultivate a thorough

understanding of the character, customs and general business climate as there may be cultural differences given the varied nature of the Malaysian demographic.

• Mezzanine and subordinated debt• The relative lack of liquidity vis-à-vis mezzanine funding

and high-yield financing in Malaysia proves to be a challenge for buyout firms looking to financially engineer their deals. Additionally, unlike financial investors, entrepreneurs are looking for parties that drive value through operations rather than financial engineering.

Year Portfolio firm Sector Buyer or investor Stake acquired (%) Deal size (US$m)

2016 Edotco Group Berhad Telecommunications Consortium led by KhazanahNasional N/A 600.0

2016 Jaya Grocer Consumer ASEAN Industrial Growth Fund 45.0 70.0

2016 GHL Systems Bhd Technology Actis 44.5 65.6

2016 Al-Ikhsan Sports Consumer Ekuinas 35.0 15.6

2016 Redcap Pharmacy Consumer Creador N/A 24.5

2016 TF Value Mart Consumer KV Asia Capital Controlling Undisclosed

…while exits have assumed varied methods.

Year Portfolio firm Sector Vendor Exit method Deal size (US$m)

2017 Serba Dinamik Energy CMS Opus PE Partial IPO 130.0

2016 Alliance Cosmetics Consumer Ekuinas Secondary 14.0

2015 Teknicast Industrial Actis Trade sale Undisclosed

Source: Preqin, Securities Commission Malaysia

Notable recent PE transactions in Malaysia

There has been continued PE interest centered around the consumer space ...

Dealmaking in the Malaysian market

Preman MenonSenior Executive DirectorTransaction Advisory Services, MalaysiaErnst & Young LLP

“The enabling environment is a reflection of the importance and appeal of PE as an asset class, which has been well-acknowledged by capital market regulators and investors alike.”


• PE investors have the unique opportunity to go beyond plain investment and to make an impact in the success of a business. An EY study on private equity value creation has revealed that strategic and operational transformations are the primary contributors in PE’s outperformance.

• General partners at the PE firms are looking to avoid poor execution of the investment thesis by building a 100-day plan with the management; only a mere 3% of the general partners say they don’t follow a 100-day plan. In the 100-day plans, revenue enhancement, management and leadership alignment, cost control, and cash generation initiatives are among the primary focus areas.

• There is a clear indication that operational transformation is an important part of the value generated. In our analysis of the estimated contributors of PE value creation, the focus of the 1980s was on leverage; in the 1990s, the focus was on multiple expansion. In the 2000s, the focus shifted to increasing earnings before moving on to operational transformation in the 2010s.

6

1.0 1.0

1.5 1.5

2.9 2.9

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1.0

2.0

3.0

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6.0

Stock market return Additional leverage PE strategic and operationalimprovement

PE outperformance

Figure 6: PE gross return versus public market, exits 2006–12

Figure 7: important items in 100 day value creation plan

3%3%

15%22%

32%34%

37%47%

56%

Use of third-party consultantsDo not use 100-day value creation plans

IT improvementsInternal controls improvements

Cash generation initiativesCost control and improvements

ReportingManagement alignment with new plans or leadership

Revenue enhancement initiatives

Value creation through operational transformations

Value creation through operational transformation is a key lever to maximize PE returns.

Private equity briefing: SEA 13

“

Qualitative assessment from EY operating partners to help

C–suite executives work out what’s urgent and important?

Develop detailed turnaround plan at initiative level with business cases and

recommendation plan owned by the

management teams

Drive initiative to executionand value or cash to bottom line

Improve functional capabilities and capabilitiesof the line team to drive sustainable change

Rapid diligence 4-6 weeks

Business planning

8-12 weeks

Turnaround implementation

6 months +

Capabilitybuilding

Performance management

Systematic tracking of performance against plans supported by rigorous weekly cadence

2

34

5

Quantitative assessment of potential improvement opportunity through rapid due diligence

1a b

Identify and assist with quick wins

Rapidtransformationand turnaround

Sriram ChangaliPartner, Strategy & TransformationErnst & Young Solutions LLP

“Work with shareholders to identify value pools at the onset to deploy resources proportionate to the value and focus attention in the right areas.”

Glenn PetersPartner, Transaction Advisory ServicesErnst & Young Solutions LLP

“Companies today are looking at ways to optimize debt on the balance sheet and debt service payments and principal repayments.”

So what does it take to run successful value creation transformations and increase likelihood of success?

• While the need for such rapid transformational change is acute, past research shows that more than 70% of transformative efforts fail (Source: Cracking the Code of Change, Harvard Business Review, 2000). Top reasons for failure will include - the lack of CEO/board alignment, not setting aspirational targets, lack of incentive system that tied to objective, poor execution plans, etc.

• These low rates of success in running large transformations are just not good enough when the stakes are so high. So what does it take to succeed?

• Our experience suggests that in order to succeed transformations need to be run in a structured five-step process outlined below:

Rapid transformation and turnaround approach – The 5 key steps


One

-tim

e ca

shEB

ITD

A

Commercial value creation

Operational value creation

► Customer mix► Pricing► Product mix

Areas of opportunity

Working capital

► Accounts receivable

► Accounts payable► Inventory

Capital allocation ► Capex

What to look for typically

► Find profit maximizing customer mix► Reduce price leakage, improve price to match willingness

to pay► Profit maximizing product mix to customers

Deb

t

► Review customer payment days against benchmarks► Optimize supplier payment days, supply chain financing

opportunity► Inventory level optimization based on SLA2, consumption, lead

times

Typical impact

Tax

Debt optimization

Tax optimization

► Procurement ► Manufacturing

and maintenance ► Supply chain and

logistics costs

► Cross-border tax and tax implications of initiatives

► Raw material purchase price, volume reduction, spec. optimization

► Improve utilization of manufacturing assets, reduces losses and waste

► Optimize maintenance costs – parts, component life ► Warehousing cost reduction, footprint optimization, logistics

cost reduction opportunities, etc.

► Review recurring capital spend and large investments against expected returns – rationalize spend portfolio

► Review interest rates of short-term and long-term debt and renegotiate if applicable

► Review extension of upcoming principal repayments based on new expected cash flow from new turnaround plan

► Review tax implications of cross-border transactions, including movement of goods or services, and choice of location of operations.

Low High

► Interest rate► Principal

repayments► Covenant review

Portfolio review ► Business unit rationalization

► Divestiture opportunities for non-core or non-performing business units

2 Service Level Agreements

Figure 8: rapid diligence phase should be aimed at uncovering profitability and cash improvement opportunities across the business.

1. Rapid diligence: quick value pool identification & leadership alignment

• The objective of this rapid diligence is to quickly identify value pools in the organization that the team can realistically drive to the bottom line. These value pools then need to be aligned with both the executive team and the shareholders.

• Management teams along with shareholders must then invest appropriate time upfront to identify all value pools across the business from top line improvement, cost reduction to working capital and debt optimization. This is important so that appropriate resources can be assigned against these value pools.

“

“Do engage the entire workforce in generating improvement ideas. Top-down initiatives usually fall off on the side given lower ownership.”

“There is a need for organizations to embrace an integrated online platform that can help keep a single source of truth.”

Angela EePartner, Transaction Advisory ServicesErnst & Young Solutions LLP

Vikram ChakravartyEY Asean Leader, Transaction Advisory ServicesErnst & Young Solutions LLP


Figure 9: typical outcome from the business planning stage

► Rapid diagnostic results shared with line team► CEO assigns targets to each of his/ her direct reports► CEO-1 cascade down targets assigns work stream

sponsor and work stream leads► Idea generation session are conducted by work

stream leads► Initiatives are validated by turnaround office and

finance► Weekly turnaround office meetings are held

How is it done? Outcome

• Once initiatives are defined and a organization-wide transformation plan is in place, it comes down to execution. This is the heart of the transformation and typically where organizations stumble.

• Organizations that perform well have a Chief Transformation Officer and a Transformation Office dedicated to the effort. This team meets each of the functional and business unit teams on a weekly basis, focusing more on decision-making and reducing bottlenecks. The appropriate issues and decisions from these sessions are then taken to the executive committee on a weekly basis.

3. Implementation: getting it done!

During implementation, weekly meetings are held between the central transformation office and each of the CEO’s direct reports. Usually, the following elements discussed:

► Delivery of earnings before interest, taxes and amortization (EBITDA) and cash projections versus plan

► Reasons for deviations at initiative level and mitigation plans► Delayed milestones and actions at initiative level - resolve and reduce bottleneck

issues as required► Issues requiring escalations and management attention - escalate to executive

committee if need be► Success stories

2. Business planning: detailed action plans to realize value pools

• Once the value pools have been identified, each of the functional or business unit teams are given set targets. These teams must then spend time identifying and defining the individual initiatives that will get them to their transformation targets. The business planning phase is critical as it involves the entire organization spending time generating ideas, developing business plans and implementation plans with detailed milestones and assigned initiative owners.

“The place where value gets created rapidly is at weekly transformation office meetings where people are held to account.”

Alan HuangED, Transaction Advisory ServicesEY, Hong Kong


Functional

► Customer life cycle management► Product mix optimization► Strategic sourcing and buying channel

optimization► Procurement transformation model► Supply chain reinvention framework ► Inventory optimization model► Warehouse operations maturity model► Sales excellence framework

Non-exhaustive

Procurement transformation model

Manage

Facilitate

Support

Delegate

Outsource

Change management framework

Driver-based performance management

Sample modules

Leadership

► Behavioral competency model ► Change management framework ► Leadership capability development framework ► End-to-end digital transformation method ► Merger integration methodology ► Driver-based performance management

4. Capability building: making change stick

• A key element to support success of the transformation is building the transformative muscle within the line team for sustainability. Organizations that succeed in transformations invest in building both functional and leadership muscle within the line teams so that change sticks.

Figure 10: capability modules that could be deployed during a transformation

Based on areas of assessment, the following modules may be deployed


Figure 11: robust weekly performance tracking – cash and recurring EBITDA through an online platform

Online transformation management platform

► Weekly report of value delivered

► Display of milestones that are delayed

► Note of initiative owners that have not met commitments

► Issues that have been highlighted for management attention

5. Performance management: single source of truth

• Large, rapid, organization-wide transformation typically involves many people and initiatives. Managing the progress of these initiatives while staying coordinated across functions and business units can be daunting. Organizations that manage these transformations well typically use some online platforms to manage the program, providing a single source of truth for all performance management related conversations.


► Focus: provide value creation services across the PE investment life cycle

► Dedicated PE experience: dedicated teams comprising former PE operating partners, seasoned operating executives and management consultants

► Broad functional knowledge: capabilities in PE fund structuring, portfolio audit, strategy, M&A and all core operating functions; experience in revenue enhancement, cost reduction, human capital and change management.

► Deep sector experience: primary focus in oil and gas, consumer, industrial, and health care; ability to tap into sub-sector professionals

► Accelerated approach: customized approach that is highly responsive and provides accelerated realization of benefits

► Global capabilities: dedicated teams that has extensive cross-border experience with access to more than 30,000 consultants operating in 140 countries with deep industry and functional know-how

Our capabilities

EY PE team comprises experienced professionals focused on PE and is supported by our deep sector and functional professionals around the world.

EY PE team

Private equity fund

► Performance improvement

► Sales force effectiveness

► Business intelligence

► 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 / Value Creation

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

Ramon [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


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Private equity briefing: Southeast Asia – November 2017 · · 2018-01-09substantial component...

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Transcript of Private equity briefing: Southeast Asia – November 2017 · · 2018-01-09substantial component...