THE private equity (PE) and venture capital (VC) industries faced headwinds in fund-raising during the first quarter of 2020, but the outlook for the medium to long term is positive, says a report by alternative-assets data-provider Preqin.
After securing a total of US$6 billion in commitments last year, no funds were closed by PE firms focused on South-east Asia in Q1 this year. In other parts of Asia, where the outbreak of Covid-19 occurred earlier, funds still registered closes but raised 48 per cent less capital than in Q1 2019.
Preqin noted that the poorer fund-raising performance could be due to the composition of the core investor base in Asean. The majority, or 79 per cent, of active limited partners (LPs) are based offshore.
In contrast, foreign investors in vehicles focused on North America, the Asia-Pacific and Europe account for 23 per cent, 43 per cent and 52 per cent of the LP base respectively.
Travel restrictions and safe distancing measures are hence likely to have had an outsized impact on fund-raising activities in South-east Asia than in other regions, said Preqin.
Deal-making and exit activity also plunged in Q1. The aggregate number and value of PE-backed buyout deals fell by 38 per cent and 74 per cent, to 10 deals and US$151 million from the year before. Business services and financial and insurance services accounted for almost all of the aggregate deal value.
The number of exits fell by 25 per cent compared with the first quarter of 2019, while aggregate exit value declined by 91 per cent.
Like the PE industry, VC fund-raising also hit a snag in Q1, with China-based ATM Capital’s US$150 million fund being the only Asean-focused venture fund to close.
The number of vehicles closed fell 75 per cent from the year before, and the total capital raised decreased 27 per cent. Deal count and value were 37 per cent and 21 per cent lower.
Preqin said that as liquidity declines and market players pause to take stock of the “new normal” in the near term, it expects PE fund-raising, deals and exits to be sluggish. When surveyed in April, 59 per cent of investors globally said they are planning to reduce their number of commitments to alternative assets this year.
As of May 2020, there were 26 Asean-focused PE funds in the market, seeking a total of US$7.4 billion. While activity in the near-term is expected to be muted, the outlook in the longer term is brighter. Among global alternatives investors surveyed, 63 per cent said they see no change to their future alternative investments strategy as a result of Covid-19.
Furthermore, there is room for growth in the region. PE penetration rate in South-east Asia is 0.35 per cent, lower than the 0.46 per cent in China and 1.39 per cent in the US.
The report also highlighted that Asean is making a big splash in the global VC pool. Assets under management jumped 38 per cent in a year to reach US$8.9 billion as at September 2019, translating to a more-than-five-time increase over the past decade. Growth in unrealised value drove much of the surge.
The region has also been the centre of a flurry of deal activity. Deal flow for angel, seed, and Series A to C financings in each year from 2015 to 2019 jumped by at least 250 per cent compared with the 2010-to-2014 period.
“In addition to supportive demographics and a compelling macroeconomic backdrop, digital transformation is sweeping through Asean. This should serve as the third driver of investment opportunities that will propel the region’s venture capital industry to new heights in the coming years,” said Preqin.