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1Private equity briefing: SEA
Private equitybriefing:Southeast AsiaSeptember 2015
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.
3Private equity briefing: SEA
01Outlook
02Investments
03Exits
04Fund-raising
05Sector infocus:ecommerce
06Taxchallenges inecommercebusinesses
07Ourservices:PE valuecreation
Contents4 5 7 8 10 13 15
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.”
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$129m investment into PropertyGuru.
• Private equity funds appear to be principally focusedon Singapore when making investments into thetechnology sector, with 10 of the 14 investmentsbeing made into Singapore-based companies.
0
10
20
30
40
0
400
800
1,200
1,600
2,000
Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Dea
lcou
nt
Dea
lval
ue(U
S$m
)
Small Mid Large Deal count
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
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$1.28b deal.
• As highlighted in the previous issue, It is becomingevident that a number of PE houses are holding ontoinvestments for a period longer than initiallyanticipated in order to generate the money multiplerequired. This creates additional risks for PE whenundertaking investments, since there is an increased
likelihood that these investments will incur a change inthe business cycle during the holding period.
• Driven by this and the ever-increasing amount of drypowder, a rise in the level of secondary buy-outs inSoutheast Asia in the coming years is expected.
• Weakening currencies and economic sentiment acrossSoutheast Asian is also impacting portfolioperformance and portfolio companies will need to beactively managed in the near term.
Exits03
Figure 2: Exit activity
Source: Thomson One, Dealogic and Mergermarket
0
4
8
12
0
500
1,000
1,500
Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Dea
lcou
nt
Dea
lval
ueU
S$m
Small Mid Large Deal count
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$4b. The BaringAsia VI was the largest PE fund ever raised by an Asia-backed PE form.
• The level of interest in the region appears to havebeen maintained with all four funds closed andmeeting the target size, and two of the four exceedingthis target.
• The level of interest in real estate-focused funds hascontinued. They comprise more than half of the fundsraised year to date.
Figure 3: PE fund-raising with Southeast Asia focus
0
1
2
3
4
5
6
7
0
2,000
4,000
6,000
8,000
Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015
Cou
nt
US$
m
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$m)
Closed Industry focus
Pamfleet Real Estate Fund II Pamfleet Group Real Estate 400 Feb 15 Property
Quadria Capital Fund II Quadria Capital InvestmentManagement
Growth 304 Feb 15 Healthcare
AREA Industrial Development Fund I AREA Advisors Real Estate 150 Mar 15 Property
Gaw NP Capital Vietnam Fund 1 Gaw Capital Partners Real Estate 70 Feb 15 Property
10Private equity briefing: SEA
Sector in focus:ecommerce05
Barriers to expanding ecommerce inSoutheast Asia► Today, ecommerce remains relatively
underpenetrated in the region, accounting for lessthan 1% of total retail sales, compared to 6%-10% inEurope, China and the US.
► The most well-known barriers are:
1) Poor connectivity due to underdevelopedbroadband infrastructure
2) Limited local players and lack of talent pool
3) Insufficient payment system
4) Concerns about data security
5) Lack of last mile logistics
Increasing opportunities► The ecommerce market in Southeast Asia is expected
to realize its potential in the coming years and growat least twice as fast as the developed countries.
1.3 1.3 1.0 1.7 0.9 0.8
25-30
10-158-12
7-10
12-15
5-7
0
5
10
15
20
25
30
Indonesia Malaysia Philippines Singapore Thailand Vietnam
US$
b
Market size
2013 level Theoretical potential
Figure 4: Southeast Asia ecommerce market potential
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$m) Acquirer
Lazada Singapore 600.0 Tesco PLC, Temasek, Summit Partners LLP; HVHoltzbrinck Ventures Adviser GmbH
GrabTaxi Holdings Singapore 248.7 SoftBank Internet and Media, Inc.
Zalora Singapore 212.0 Access Industries, Inc.; Scopia Capital Management LP,Summit Partners LLP
Ensogo Limited Thailand 100Ward Ferry Management Limited; Acorn CapitalLimited; Vipshop Holdings LimitedPublic offering
Reebonz Pte Ltd Singapore 39.8Vertex Venture Holdings Ltd.; Intel Capital; GGVCapital; Infocomm Investments Pte Ltd.;MediaCorp Pte Ltd.; Matrix Partners China
DEALGURU Holdings Pte Ltd Singapore 34.3 Ensogo Limited
iFlix Sdn Bhd Malaysia 30.0 Philippine Long Distance Telephone Company;Catcha Group
Table 3: Recent major ecommerce deals in Southeast Asia
12Private equity briefing: SEA
Who will be a champion in this game?
1. Choice of business model
• B2B2C marketplace will provide the most potentialto grow scale within ecommerce
• B2B2C model enables better margins due tooverheads (i.e., no inventory cost)
• Vertical players have limited margins as scale islimited – only has small customer base, comparedto the marketplace model
3. Keeping prices competitive
• Eighty-one percent of consumers compare pricesonline before deciding on their purchases
• Consumers go online for cheaper deals and the lowprice is a strong determinant of conversion rates toactual purchases
2. Scale matters
• Large players enjoy “winner takes all”
• Allows for integration across the value chain
• Increases geographical reach to more markets
4. Localization is key
• Localizing merchandising determines traffic andconversion to actual sales
• Creating partnerships with local companies forpromotions and deals
• Localizing fulfilment capabilities determinesretention rate
• Is it a localized domain?
• Does it allow customers to shop in localcurrency?
• Does it offer customers local promotions ordeals?
• Does it have local fulfilment partnerships?
Retail or ecommerce sites Price (S$)
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
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
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.
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
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
17Private equity briefing: SEA
18Private equity briefing: SEA
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