As the world’s economy moves closer to a recovery from the Covid-19 pandemic, sectors in Southeast Asia will draw more attention from private equity funds due to their long-term economic and growth possibilities.
In its private equity outlook note for 2023, law firm Morrison Foerster said the investment momentum for technology, health care, life sciences, and financial services is set to extend post pandemic.
“These are areas in which we have consistently seen our clients show strong interest throughout the Covid years and in which we expect to continue to see strong interest,” said Marcia Ellis, global co-chair of the firm’s private equity practice told AsianInvestor.
“Covid has revealed real gaps in the health care systems in many jurisdictions in Asia and thus strengthened the appetite of consumers for private and specialised health care facilities. We expect to see PE investment in this sector especially in South and Southeast Asia,” she said.
Consumer, manufacturing, and industrial sectors will also feature prominently on sponsors’ radars as multinational corporations are shifting manufacturing and supply chains away from China to countries such as Vietnam, Indonesia, and Bangladesh according to the firm’s outlook report.
“MNCs are shifting manufacturing away from China [for reasons] including US/China tensions, rising wages in China and the shrinking Chinese population,” said Ellis.
Additionally, Covid taught all investors that they shouldn’t have all of their eggs in one basket in case there are lockdowns impacting one jurisdiction and not others, she said.
“The ability to be able to continue production is key,” said Ellis. “We have already assisted PE funds doing bolt-on acquisitions for their Chinese portfolio companies to add manufacturing facilities in, for example, Vietnam. We also expect to see PE funds providing financing to companies that want to diversify their manufacturing base.”
Morrison Foerster’s outlook predicts economic growth to heat up faster in China than in the US or Europe due to the lifting of Covid-19 restrictions in China and expected actions to be taken by the Chinese government to revive the market.
This may result in global private equity funds significantly increasing their allocations to China despite continued geopolitical tension with the US.
“We are already seeing an upswing in PE activity in China. There is an expectation that China’s growth engine will move into at least moderately high gear by Q2 or Q3 at the latest and PE funds will chase those growth opportunities,” said Ellis.
Chinese GPs are also seeking more diversified exposure and are keen to attract new capital in Southeast Asia, particularly from family offices in Singapore, she said.
FOCUS ON PROFITABILITY
With macroeconomic headwinds anticipated in 2023 and PE investors continuing to store up dry powder, the report predicts private equity sponsors will take advantage of global opportunities offered in distressed assets and from companies in need of capital.
“Credit funds and special situations funds are currently quite hot,” and have been gaining the most traction with Asian and APAC institutions, said Ellis.
With rising costs and tighter credit markets, Ellis expects private equity funds to try and optimise the performance of their portfolio companies by focusing on profitability.
“Debt market conditions will improve over 2023, especially if the Fed funds rate peaks or plateaus. This will also affect the pace of exits as the economic situation improves in certain countries or regions.”