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SOUTH-EAST Asia’s private equity (PE) industry is holding its head above water, but needs stronger stock markets to support exits via initial public offerings (IPOs). That is the verdict from Bain & Company’s Southeast Asia Private Equity 2023 Year in Review, released on Thursday (May 30).

Bain’s data showed that PE deal values fell across all Asia-Pacific markets last year except Japan, where deal value increased 80 per cent. South-east Asia did relatively well, with deal value falling 35 per cent.

Greater China, India and Australia-New Zealand reported sharper falls of 37 per cent, 44 per cent and 67 per cent, respectively. South Korea was the only market to outperform South-east Asia, with an 18 per cent fall.

The picture is slightly less rosy when it comes to exits, though. South-east Asia experienced a 60 per cent decline in exit values last year to US$2.8 billion, from US$6.8 billion in 2022. The number of exits fell 70 per cent, from 21 to six.

The weak exit environment is not unique to the South-east Asia region; but a survey conducted by Bain showed exit conditions are a bigger concern among PE players here than in other Asia-Pacific markets.

South-east Asian PE fund managers were most likely to be concerned about challenging exit conditions, whereas Apac fund managers were most likely to be concerned about challenging macroeconomic conditions.

“Dealing with this exit overhang is going to be very important,” said Suvir Varma, advisory partner at Bain’s global PE practice. “The fact that we have reasonably tepid stock exchanges in our region is a constraining factor.”

Varma pointed to the relatively low velocity of the region’s exchanges. The Philippine Stock Exchange had the highest velocity of 73 per cent in 2023, but that was far below the Shanghai Stock Exchange’s 192 per cent.

Velocity is the ratio of traded value to market capitalisation, and indicates how much trading activity there is on an exchange. Vietnam’s Ho Chi Minh Stock Exchange clocked the lowest velocity of 9 per cent. The Singapore Exchange’s velocity was 32 per cent.

Healthy stock markets are particularly important for South-east Asia’s PE funds because the lion’s share of the region’s PE deals are based on a growth strategy. In five of the last four quarters, growth capital accounted for close to or more than 80 per cent of total investment deals.

This skew is natural given the region’s fast-growing economies, which are being supported by favourable demographics and rising consumption. Growth-oriented deals are made in companies that are established, but need more money to grow.

This strategy contrasts with early-stage investments into companies that may not yet have turned a profit, and buyouts that focus on mature companies.

“(In) a developed market, you will see that the buyout percentage is much higher,” said Usman Mokhtar, senior partner and head of Bain’s South-east Asia PE practice. “That has had some level of influence on the exit struggle.”

Varma said PE exits globally are relatively evenly spread across three main strategies: IPOs, sales to other companies, and sales to other funds; although the latter, commonly referred to as secondaries, is slightly popular than the former two.

Growth strategies, however, tend to favour exits via IPOs; and many of South-east Asia’s PE managers would have made earlier investments with the expectation of being able to exit via an IPO.

Many PE managers would have invested in the region’s companies for their growth opportunity. That growth is still happening, he said, but the IPO markets “have not supported those kinds of businesses”.

Over time, he expects deals in South-east Asia to skew away from growth. For investments already made, however, an opportunity to exit is paramount.