PE Downturn – Opportunity Knocks on Investors’ Door

According to S&P Global Market Intelligence, the Private Equity (PE) and Venture Capital (VC) investments in Asia Pacific region (excluding Japan) have experienced a significant decline in the Q2 of 2023 with total investment recorded at only USD6.0 billion, a y-o-y drop of about 34.5% from USD9.2 billion recorded last year. The number of deals slid 23.3% to 46 from 60 in the same period.

The sluggish market and deal-making in the H1 of 2023 has presented limited opportunities for PE firms to deploy funds into buyouts and other investments, resulting in accumulated PE dry powder to up by 11.1% as of July 2023. According to S&P Global Market Intelligence, a total of USD2.49 trillion was seated in dry powder (capital from investors that has not been deployed). The slowdown in deal-making was largely due to the uncertain global economic outlook on top of the rising of transaction costs linked to high interest rates. 

Nevertheless, experts foresee a gradual improvement in deal activity during 2024 and 2025, attributed to the stabilization of pricing, moderation of interest rates and fading in recession fears. The mid-market segment has also shown signs of revival in recent times, supported by the expectation of quantitative tightening and a more consistent growth in inflation.

The Current Stand-Off

The current slowdown in private equity can be compared to a stand-off. Sellers want higher prices like those during better economic times, but buyers want more reasonable prices. Consequently, the negotiation process is anticipated to extend and deals are taking longer to happen. 

Nevertheless, this circumstance is deemed a customary phase within the PE life cycle. Such conditions frequently give rise to an optimal investment environment where private market asset prices have adjusted to realistic levels. Once this adjustment happens, we can expect a significant increase in deal-making over the next two years.

When Opportunity Knocks

While the PE deal scene remains subdued, challenging conditions have created potential and promising opportunities in the market. The current environment can provide investors with significant opportunities to invest in good companies at discounted prices.

According to the leader of PwC Singapore’s corporate finance, the present situation offers investors the chance to invest in strong companies at a lower and discounted cost. The growing dry powder or available investment funds is a significant result of investors preparing for a potential significant market downturn in the near future. The PE investments are still appealing because many business owners, investors, and companies with surplus funds after the pandemic are now eager to put those funds to use.

In Asia, there is a notable influx of special situations and restructuring funds entering the scene to take advantage of potential opportunities. Mid-market deals have also started to pick up in recent months with the outlook of quantitative tightening and inflation growth looking more stable. The increase in private capital in Singapore and Southeast Asia has attracted more investors looking to invest in the mid-market sector, likely driving the recovery of PE activities for the remainder of the year. The point of investment interest will concentrate particularly in resilient sectors such as healthcare and consumer staples, where we can expect a rise in activity in these sectors that tend to hold up well during uncertain times.