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1 Private equity briefing: SEA Private equity briefing: Southeast Asia September 2015

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1Private equity briefing: SEA

Private equitybriefing:Southeast AsiaSeptember 2015

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2Private equity briefing: SEA

This quarterly briefing offersyou a roundup of the privateequity deals and capitalactivities across majorsectors in the quarter andtrends that are shapinginvestment decisions today.

It distills the perspectives ofour team of subject-matterprofessionals in the regioninto pertinent insights tokeep you ahead in navigatingthe private equity landscape.

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3Private equity briefing: SEA

01Outlook

02Investments

03Exits

04Fund-raising

05Sector infocus:ecommerce

06Taxchallenges inecommercebusinesses

07Ourservices:PE valuecreation

Contents4 5 7 8 10 13 15

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4Private equity briefing: SEA

Outlook

The number of private equity (PE) deals executed across Southeast Asiapeaked in 2Q15 – the highest since the global financial crisis. Thisreflects the continued increase in appetite that PE is demonstratingacross the region.A total of 42 PE transactions were completed in the quarter. This is an increase of almost 50% compared to the sameperiod in 2014 when 29 deals were completed. The level of equity was also up, with a total of US$740m invested,compared to US$475m in 2Q14.

The increased activity is reflective of the overall M&A market currently, with the number of deals and deal valuedisplaying similar trends. Technology continues to be at the forefront of all M&A activities with deal values in thesector now beginning to increase. Financial services is another active sector with the majority of transactions takingplace in investment companies and banking sub-sector, indicating that Southeast Asian markets remain attractive tothe growth strategies of most of the domestic and foreign banks.

EY’s Global Corporate Divestment Study 2015 found that 60% of executives in Asia-Pacific expect the number ofstrategic sellers to increase in 2015. This suggests that there will be plenty of M&A activity and an availability ofassets as companies seek to improve portfolio performance and shareholder returns through divestments. In turn, thispresents a considerable opportunity for PE to acquire non-core and potentially under-performing assets from largercorporations.

Other moves in the region such as the impending commencement of the ASEAN Economic Community, which will seethe integration of the region’s economy, should spur M&A activity across the rest of the year and beyond, ascompanies look to establish or expand their presence to seize business opportunities.

01

Luke PaisAsean Leader,M&A and Private Equity

“We are in a period of volatility in Southeast Asia. This creates opportunitiesfor PE investment as companies will need to raise capital, which may not beforthcoming from traditional sources.”

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5Private equity briefing: SEA

Investments02

Figure 1: Investment activity

Source: Thomson One, Dealogic and Mergermarket

• The second quarter of 2015 saw continued increase inthe number of investments, with a total of 38 deals.These investments have been focused on the small(10 deals) and mid-market (11 deals), with theremaining transactions having undisclosed dealvalues, amounting to a total investment of US$740m.Investments have remained focused on Singapore (20)and Indonesia (11).

• The technology and consumer sectors continued todominate. Technology accounted for 14 of the dealsand a total of US$173m being invested. The majorityof deals have been focused on start-ups or early stage

investment with less than US$10m being invested.The largest deal was TPG Capital Management’sUS$129m investment into PropertyGuru.

• Private equity funds appear to be principally focusedon Singapore when making investments into thetechnology sector, with 10 of the 14 investmentsbeing made into Singapore-based companies.

0

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Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Dea

lcou

nt

Dea

lval

ue(U

S$m

)

Small Mid Large Deal count

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6Private equity briefing: SEA

Table 1: Top investments in Q2 2015

“Technology will be an exciting space with lots of deal activity over the next fewyears. The impact of technology is felt across industries, which see existingbusiness models being disrupted and re-engineered. There is a lot of capitalavailable to technology companies; and existing brick and mortar businesses arealso actively embracing technology for growth.”

Source: Thomson One, Dealogic and Mergermarket

Purandar RaoSingapore Head,Transaction AdvisoryServices

Investmentdate

Company Country Sector Value(US$m)

Investor

Jun 15 PropertyGuru Pte Ltd Singapore Technology 129.4 TPG Capital Management LP

Jun 15 Vincom Retail Vietnam Consumer products andretail

100.0 Warburg Pincus LLC

Apr 15 Express Transindo UtamaTbk PT

Indonesia Automotive andtransportation

98.2 Saratoga Investama Sedaya Tbk PT

May 15 Fullerton Healthcare GroupPte Ltd

Singapore Provider care 83.5 Southern Capital Group Pte Ltd

Jun 15 BankMAXpower Group PteLtd

Singapore Power and utilities 60.0 IL & FS Investment Managers Ltd

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7Private equity briefing: SEA

• Exit activity remained low in 2Q15, with only fourdeals recorded. A number of exits continue to beexecuted but go unreported.

• A number of deals that were announced in the secondquarter but were yet to complete include NavisCapital’s exit of ECO Industrial EnvironmentalEngineering to Beijing Capital Group in a US$179mdeal and Bain Capital’s disposal of FCI Asia to US-headquartered Amphenol in a US$1.28b deal.

• As highlighted in the previous issue, It is becomingevident that a number of PE houses are holding ontoinvestments for a period longer than initiallyanticipated in order to generate the money multiplerequired. This creates additional risks for PE whenundertaking investments, since there is an increased

likelihood that these investments will incur a change inthe business cycle during the holding period.

• Driven by this and the ever-increasing amount of drypowder, a rise in the level of secondary buy-outs inSoutheast Asia in the coming years is expected.

• Weakening currencies and economic sentiment acrossSoutheast Asian is also impacting portfolioperformance and portfolio companies will need to beactively managed in the near term.

Exits03

Figure 2: Exit activity

Source: Thomson One, Dealogic and Mergermarket

0

4

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12

0

500

1,000

1,500

Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Dea

lcou

nt

Dea

lval

ueU

S$m

Small Mid Large Deal count

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8Private equity briefing: SEA

Fund-raising04

• Q215 saw a solid level of funds being closed. Therewere four funds closed at a total commitment inexcess of US$924m.

• Despite not meeting the levels of capital raised in theprevious quarter, this is in part due to the closing ofBaring Asia VI in Q1, which raised US$4b. The BaringAsia VI was the largest PE fund ever raised by an Asia-backed PE form.

• The level of interest in the region appears to havebeen maintained with all four funds closed andmeeting the target size, and two of the four exceedingthis target.

• The level of interest in real estate-focused funds hascontinued. They comprise more than half of the fundsraised year to date.

Figure 3: PE fund-raising with Southeast Asia focus

0

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2,000

4,000

6,000

8,000

Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015

Cou

nt

US$

m

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9Private equity briefing: SEA

Table 2: Top funds closed with Southeast Asia focus in Q2 2015

Benedict LimManaging Director,Real Estate M&A

“In Southeast Asia, real estate asset inflation was seen amid weakening currenciesand relatively cheap capital availability. However, prices have started to come offtheir peak. A further weakening in asset prices is expected and capitalized fundsnow look to buy into attractively priced good quality and fundamentally soundreal estate assets. There may be some level of balance sheet distress but the rightdecision drivers must guide opportunity evaluation. Southeast Asia is the nextreal estate hub for value, opportunities and core capital given the asset inventoryis in different stages of property cycle and landscape maturity.”

Source: Preqin

Fund name Manager Type Commitments(US$m)

Closed Industry focus

Pamfleet Real Estate Fund II Pamfleet Group Real Estate 400 Feb 15 Property

Quadria Capital Fund II Quadria Capital InvestmentManagement

Growth 304 Feb 15 Healthcare

AREA Industrial Development Fund I AREA Advisors Real Estate 150 Mar 15 Property

Gaw NP Capital Vietnam Fund 1 Gaw Capital Partners Real Estate 70 Feb 15 Property

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10Private equity briefing: SEA

Sector in focus:ecommerce05

Barriers to expanding ecommerce inSoutheast Asia► Today, ecommerce remains relatively

underpenetrated in the region, accounting for lessthan 1% of total retail sales, compared to 6%-10% inEurope, China and the US.

► The most well-known barriers are:

1) Poor connectivity due to underdevelopedbroadband infrastructure

2) Limited local players and lack of talent pool

3) Insufficient payment system

4) Concerns about data security

5) Lack of last mile logistics

Increasing opportunities► The ecommerce market in Southeast Asia is expected

to realize its potential in the coming years and growat least twice as fast as the developed countries.

1.3 1.3 1.0 1.7 0.9 0.8

25-30

10-158-12

7-10

12-15

5-7

0

5

10

15

20

25

30

Indonesia Malaysia Philippines Singapore Thailand Vietnam

US$

b

Market size

2013 level Theoretical potential

Figure 4: Southeast Asia ecommerce market potential

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11Private equity briefing: SEA

0

5

10

15

20

25

30

2011 2012 2013 2014Singapore Thailand Malaysia Indonesia Philippines

Figure 5: Total number of PE transactions in ecommerce in Southeast Asia (2011-14)

Source: Emarketer, Euromonitor, Capital IQ, EY Analysis

26

17

68

Target/issuer Country Total value(US$m) Acquirer

Lazada Singapore 600.0 Tesco PLC, Temasek, Summit Partners LLP; HVHoltzbrinck Ventures Adviser GmbH

GrabTaxi Holdings Singapore 248.7 SoftBank Internet and Media, Inc.

Zalora Singapore 212.0 Access Industries, Inc.; Scopia Capital Management LP,Summit Partners LLP

Ensogo Limited Thailand 100Ward Ferry Management Limited; Acorn CapitalLimited; Vipshop Holdings LimitedPublic offering

Reebonz Pte Ltd Singapore 39.8Vertex Venture Holdings Ltd.; Intel Capital; GGVCapital; Infocomm Investments Pte Ltd.;MediaCorp Pte Ltd.; Matrix Partners China

DEALGURU Holdings Pte Ltd Singapore 34.3 Ensogo Limited

iFlix Sdn Bhd Malaysia 30.0 Philippine Long Distance Telephone Company;Catcha Group

Table 3: Recent major ecommerce deals in Southeast Asia

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12Private equity briefing: SEA

Who will be a champion in this game?

1. Choice of business model

• B2B2C marketplace will provide the most potentialto grow scale within ecommerce

• B2B2C model enables better margins due tooverheads (i.e., no inventory cost)

• Vertical players have limited margins as scale islimited – only has small customer base, comparedto the marketplace model

3. Keeping prices competitive

• Eighty-one percent of consumers compare pricesonline before deciding on their purchases

• Consumers go online for cheaper deals and the lowprice is a strong determinant of conversion rates toactual purchases

2. Scale matters

• Large players enjoy “winner takes all”

• Allows for integration across the value chain

• Increases geographical reach to more markets

4. Localization is key

• Localizing merchandising determines traffic andconversion to actual sales

• Creating partnerships with local companies forpromotions and deals

• Localizing fulfilment capabilities determinesretention rate

• Is it a localized domain?

• Does it allow customers to shop in localcurrency?

• Does it offer customers local promotions ordeals?

• Does it have local fulfilment partnerships?

Retail or ecommerce sites Price (S$)

Qoo10 80

Ebay 121

Lazada 133

Luxola 191

Retail price of ‘S’ cosmetics 191

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

EBITDA

High levelof capex

Inflection pointAmazon launches marketplace

AchievespositiveEBITDA

After spending US$570m,Amazon was able to reachinflection point and enjoy

exponential sustainable growth.

Amazon EBITDA / capital expenditure (US$m)

— EBITDA — Capex

“The ecommerce sector is not easy for PE to invest into, due to a limited number ofsizeable and profitable opportunities in Southeast Asia. However, as ecommerceacross the region is still at an early stage of development and driven by the factthat ‘winners take all’, there are highly attractive potential returns from investingselectively in this space.”

Joongshik WangAsean Leader,Corporate FinanceStrategy

Source: Emarketer, Euromonitor, EY Analysis

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13Private equity briefing: SEA

Ecommerce businesses are often born global and grow at an astonishing rate.Management teams are typically lean with a limited starting budget and arefocused on executing the strategy while keeping up with the global demand fortheir products. Back-office systems, procedures and compliance rarely keeppace. Couple these features with an increased focus by global revenueauthorities, companies inevitably run into disputes with the taxman in thejurisdictions they operate.

A number of the actions under the OECD Base Erosion and Profit Shifting project are either squarely focused onecommerce or likely to have a significant impact on this industry, if fully adopted on a global basis. The key taxissues that ecommerce businesses need to focus on include:

Transfer pricing: While the group may be in overall losses for a period of time,typically one entity in the group will be providing centralized shared services typefunctions to the broader group. Depending on where that entity is located, the revenueauthority in that location may argue that appropriate at arm’s length fees need to berecognized for those services. However, opportunities may exist to charge groupentities for intellectual property in a tax-effective manner.

Source of income: Traditional concepts of source are often difficult to apply withrespect to activities carried out by an ecommerce business that has no physicalpresence in a country where significant sales are being generated. Related to this pointis the difficulty that revenue authorities have in determining whether a permanentestablishment has been created in their country when the extent of activities is limitedand the sales are generated through customers clicking a mouse to place an orderthrough a server that could be located anywhere.

Tax challenges forecommercebusinesses06

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14Private equity briefing: SEA

Darryl KinneallyPartner,Transaction Tax

“Governments globally are struggling to apply old taxation concepts to ecommercebusinesses. Many of the initiatives that are being pushed by the OECD haveecommerce businesses squarely within their sights. Both start-ups and moreestablished players will that they are increasingly forced to focus on tax.”

As governments around the world see more traditional economic activities being moved online and potentiallyoffshore outside of their tax net, there will be increased scrutiny on ecommerce players. It is imperative that thesystems and structures in these businesses provide ample support for the tax positions that they have taken.Companies should get things right from the outset and have in place tax effective operating models andstructures.

Issues of substance and treaty protection: There is a global shift towards requirementfor substance in an entity before it is treated as a tax resident and avail itself of treatybenefits that might be available. Even relatively benign tax jurisdictions such as HongKong and Singapore have gone down this path. The use of entities within these twojurisdictions and the ability to claim treaty benefits with countries such as Indonesiahave been adversely impacted. The concept of an entity needing to be the beneficialowner of income and not merely a conduit is gaining pace either in countries domesticlaw (e.g., Indonesia) or in the negotiation of tax treaties. As an ecommerce businessmatures, this may be less of an issue as the company grows its employee base and areable to better justify that they have the necessary substance in the relevant country.

VAT or GST: Governments globally are frustrated by the loss of indirect tax revenuessuch as VAT and GST, as consumer shopping habits change to buying goods fromwebsites located offshore. Despite the costs of administering and collecting GST or VATfor such sales, some governments, e.g., Australia, are going down this route. Such anapproach will impact the competitiveness of the product pricing that may havepreviously been bought online, free of any indirect tax and depending on how it isimplemented, increase the administrative burden on the ecommerce business.

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15Private equity briefing: SEA

Our services:PE value creation07

► Focus: Deliver value creationservices across the PE investmentlife cycle

► Dedicated PE experience:Dedicated team comprising formerPE operating partners, seasonedoperating executives andmanagement consultants

► Broad functional knowledge:Capabilities in strategy, M&A andall core operating functions;experience in revenueenhancement, cost reduction,human capital andchange management

► Deep sector experience: Primaryfocus in oil and gas, consumer,industrial, and health care; ability totap into sub-sector specialists

► Accelerated approach: Customizedapproach that is highly responsiveand provides accelerated realizationof benefits

► Global capabilities: Dedicated teamthat has extensive cross-borderexperience with access to morethan 30,000 consultants operatingin 140 countries with deep industryand functional know-how

Our capabilities

Our PE value creation (PEVC) teamcomprises professionals focused onPE and is supported by EY’s deepsector and functional specialistsaround the world.

PE value creation team

Privateequityfund

► Performanceimprovement

► Sales forceeffectiveness

► Businessintelligence

► 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

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16Private equity briefing: SEA

Contact usService line contactsM&A

Luke [email protected]+ 65 6309 8094

Benedict [email protected]

+ 65 9113 3718

Corporate Finance Strategy

Vikram [email protected]

+ 65 6309 8809

Joongshik [email protected]

+ 65 6309 8078

Transaction Support

Purandar [email protected]

+ 65 6309 6560

Geophin [email protected]

+ 65 6309 8168

Transaction Tax

Eng Ping [email protected]

+ 603 7495 8288

Darryl [email protected]

+ 65 6309 6800

Valuation & Business Modeling

Andre [email protected]

+ 65 6309 6214

Wouter van [email protected]

+ 65 6309 8878

Country contactsIndonesia

David [email protected]

+ 62 21 5289 5025

Sahala [email protected]

+ 62 21 5289 5210

Malaysia

George [email protected]

+ 60 3 7495 8700

Preman [email protected]

+ 60 3 7495 7811

Philippines and Guam

Renato [email protected]

+ 63 2 891 0307

Singapore

Purandar [email protected]

+ 65 6309 6560

Luke [email protected]

+ 65 6309 8094

Geophin [email protected]

+ 65 6309 8168

Sanjeev [email protected]

+ 65 6309 8688

Karan [email protected]

+ 65 6922 9460

Joongshik [email protected]

+ 65 6309 8078

Thailand

Ratana [email protected]

+ 66 2 264 0777

Piyanuch [email protected]

+ 66 2 264 9090

Vietnam

Anthony [email protected]

+ 84 8 3824 5252

Global contactsGlobal

Jeffrey [email protected]

+ 1 212 773 2889

Michael [email protected]

+ 1 214 969 0675

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17Private equity briefing: SEA

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18Private equity briefing: SEA

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