Private equity will have a more positive 2025 than it's had recent years, and institutional investors will likely turn their focus to managers that invest in “good businesses (that) generate cash flows,” top executives from Temasek-backed asset managers said.
“Obviously the capital markets are opening up a little bit, and I’m optimistic that with inflation moderating and interest rates (being supportive of) the stock market, this will provide IPO (opportunities),” said Dickson Loo, managing director for private equity at SeaTown, which manages over $4 billion in assets.
In the last two years, investors “have not been able to consummate a deal because valuation expectations have been still very high. We see that valuation multiples have trended down… and we've seen this in transactions as well,” he said during a media roundtable held in Singapore on Jan. 21.
In addition, exit opportunities over the past two years have dwindled, as opposed to the 2010s when soaring valuations and attractive returns led private equity investors to take on more risk by investing in businesses earlier in the lifecycle.
Consultancy firm McKinsey found that capital deployment to venture capital exceeded the surge in fundraising to private equity in general, reaching 17.8% in compounded annual growth rate between 2013 and 2018 compared with 6.2% for private equity in general, according to the McKinsey Private Markets Annual Review: 2017 to 2022.
Faced with fewer exit opportunities, “a lot of people are going back to its roots, where private equity is (about) investing in good businesses that generate cash flows which are resilient to different global (liquidity) conditions,” said Jimmy Phoon, chief executive officer of Seviora Group, a Temasek-owned entity that manages over $50 billion in assets.
Investors are focusing on the types of businesses they invest in and how resilient the businesses are to different macroeconomic conditions, including high and low-rate environments, he added.
Opportunities can particularly be found in small-cap and mid-market companies, and in Southeast Asia, the executives said.
Some of the larger private equity funds own relatively big companies, and they find it difficult to exit the market now because there is no one to buy them, said Chue En Yaw, chief investment officer of the $11 billion Azalea Investment Management, who will take up chief executive officer duties in April.
Both Azalea and SeaTown are part of Seviora, which is owned by Singapore state investment firm Temasek, which had S$389 billion ($287.9 billion) in assets as of March 31.
These large companies are not in a position for an initial public offering, and there are no strategic funds that have the capacity to buy them, Chue added.
“We don’t see that in the small-cap and the mid-market companies, because, number one, they didn't use a lot of leverage, so in the first place, they weren't really affected by the increase in interest rates,” he said.
In this area of the market, there is still a lot of activity that is not widely reported given that they are not listed companies, he added.
A lot of the activity is the result of buy-and-build strategies in Asia “where the businesses are a lot smaller and you have a market that is a lot more diversified,” Seviora’s Phoon added.
The mid-market segment has drawn interest, particularly in Southeast Asia over the past 10 years, SeaTown’s Loo said.
“In Southeast Asia, there are about 70 million SMEs that contribute about 45% of the region's GDP. Having spoken to business owners in this segment for over a decade, we do see that there is a great acceptance in terms of using private equity as a source of funding,” he said.
“Therefore, I (would) say that business owners, who have been traditionally a bit more hesitant, are a lot more sophisticated, not just on the private equity side, but also on the private credit side. And this is really driving growth in this segment,” he added. “We are also quite excited about this segment. We see a lot more interest moving into the segment because there is quite a lot of dry powder looking to deploy in Southeast Asia.”
