Total disclosed PE and VC deal value down 65% in Q1: EY

PRIVATE equity (PE) and venture capital (VC) activity in South-east Asia was sluggish in the first quarter of 2020 amid the Covid-19 pandemic, though investments in some segments are expected to pick up as economies emerge from lockdowns, EY has said.

The total disclosed deal value, at US$1.4 billion, was 65 per cent lower than a year ago; the number of deals fell 9 per cent to 141 deals, said the report released on Wednesday.

Exit activity was also largely muted. Announced exits across both PE and VC funds dipped to six deals in Q1 2020 from nine in Q1 2019.

PE aggregate deal value in Q1 fell 47 per cent to US$1.1billion; deal volume fell to 16 from 21. Deal value was undisclosed for four of 16 announced PE transactions in Q1 2020, and for six of 20 announced PE transactions in Q1 2019.

Despite the fall in investment activity, EY noted that take-private deals are expected to surge on the back of a fall in debt rate and lower valuation of listed firms.

VC deal value of disclosed transactions plunged 82 per cent to US$392 million from US$2.1 billion last year. Volume dipped slightly by 7 per cent to 125. Deal value was undisclosed for 32 of 125 announced VC transactions in Q1 2020, and for 54 of 133 announced VC transactions in Q1 2019.

The largest deal in Q1 was MUFG Innovation Partners and Krungsri Finnovate's US$706 million investment in Singapore-based Grab.

Private market fund-raising levels declined due to Covid-19-related uncertainties. The value of funds raised dipped to US$1.3 billion across five funds in Q1, compared with US$1.4 billion across eight funds the year before.

Notably, dry powder reached record levels of US$439 billion by mid-May 2020. Having taken stock of the liquidity position and scenario planning for their portfolios in the past few months, private market funds are now actively assessing new opportunities, said Luke Pais, EY's Asean leader for mergers and acquisitions and private equity.

"There is a high level of liquidity with the funds, and as economies emerge from lockdown, corporates and entrepreneurs will need capital solutions. We expect to see activity in the areas of structured finance, public to private, capital recycling, non-core divestments and sector and segment consolidation," he said.

That said, EY expects Q2 to be a slow quarter as well. Private market funds are now working with their portfolio companies for liquidity management, strategy and business-model validation, supply-chain management and value creation focused on digital capabilities.

Fund managers are also trying to understand the tax implications of the downturn. In some cases, PE firms are acquiring the debt of their own portfolio companies, which can trigger tax consequences, said EY.