PETALING JAYA: Private equity (PE) firms are undeterred from investing in Malaysia’s consumer, healthcare and technology sectors despite the tough operating business environment, according to industry experts.
Although there could be some PE funds exiting from the local market amid higher interest rates and inflationary pressure, observers said there are some sectors that would be able attract such firms.
The PE firms comprised of funds and entreprenuers that will invest in private companies or engaged in the buyouts.
According to Maybank Investment Bank (Maybank IB) head of advisory Reza Mohd Zin, PE firms are interested in the country as “they still have substantial dry powder or funds available for investment.”
He told StarBiz that the top picks among the PE are the consumer and healthcare sectors given the prospects of favourable long-term demographics and rising incomes.The technology sector, meanwhile, has seen significant cooling of interest, he said adding that investors are focused on “path-to-profitability” and no longer willing to underwrite growth or market share at all costs.
Therefore, companies are seen to be exploring convertible debts instead of equity to bridge the gap in valuation expectations, Reza explained.
He said PE funds were also under pressure to deliver exits, and were trying to sell consumer and light manufacturing assets.
“Hence, it will be interesting to see the response from strategic buyers given the current economic conditions,” he added.
Meanwhile, Deloitte Malaysia financial advisory executive director, corporate finance advisory Yap Kong Meng said PE markets would likely face more difficulties in raising new funds given the increase in global interest rates.
However, he concurred that some PE firms would continue to be active.
At the same time, PE investors tend to be sector agnostic, added Yap.
In Malaysia, he noted that such investors tend to be active in consumer, manufacturing, technology and healthcare sectors.
In terms of PE deals, Yap expects the volumes in the country to be flattish when compared with last year’s performance.
“Some sectors continued to do well a year after Malaysia removed its last travel restriction but some have been experiencing a dip in financial performance after an uplift from the post Covid-19 pandemic reopening.
“Some sectors are also starting to drive up more merger and acquisition volumes, benefiting from strong global tailwinds or trends such as continuous digitisation across all sectors, push for renewable or alternative energy, electrification of vehicles, and a rising interest rate environment that is triggering more financially distressed sales,” he said.
UCSI University Malaysia assistant professor in finance Liew Chee Yoong, who is also a research fellow at the Centre for Market Education, said the country could expect continued interest in both the technology and healthcare sectors from the PE firms.He said a number of potential good deals would occur this year although the growth of the PE market would not be as vibrant as last year.
This is because the economic environment, in general, does not encourage PE firms to invest substantially in private firms’ shares due to potential economic headwinds from abroad such as a possible global financial crisis, according to Liew.
“I think the biggest potential challenge for the local PE market this year is global economic instability.
“However, I still expect this market to grow this year, but not as strong as last year.
“Generally, the domestic PE market has not enjoyed the kind of growth other markets have experienced in the past decade.
“The country had experienced a slow increase in the number of registered PE management firms as well as the number of PE professionals,” Liew pointed out.
Despite near-term uncertainty, the long-term outlook for private capital investment in South-East Asia remains positive, according to global management consulting firm Bain & Co.
The PE market in South-East Asia saw a slowdown in deal activity in 2022.
However, the region’s long-term macro fundamentals remained strong, said the Bain & Co’s South-East Asia private equity report 2023.
The deals value in the region saw a decline of 52% in 2022, compared with the previous year, with the deals count also down 15% year-on-year.
The analysis by Bain showed that macroeconomic conditions in the region has been more resilient than the rest of Asia-Pacific.
The real gross domestic product (GDP) growth in South-East Asia continued to be strong while inflation related indices remained moderate, it said.
In addition, ongoing geopolitical tensions between the United States and China would continue to create opportunities for businesses in the region.
The consulting firm said: “The challenge for investors would be on doing the basics well – sourcing good deals and driving value in their portfolio companies. South-East Asia remains an attractive place to deploy capital in the long term.”
Furthermore, the market fundamentals are still there and investors will be able to find attractive opportunities, according to the company.
“However, competition will be intense for the assets and multiple expansion will no longer be a sustainable return-driver.
“That puts more pressure on investors to create value during their ownership period,” said Suvir Varma, a senior adviser of Bain’s global PE practice who is based in Singapore.