Daniel Yong

Southeast Asia has become an interesting region to watch in terms of dealmaking activity. How would you describe the current state of the M&A market?

Southeast Asian dealmaking, within the wider regional context, is being fueled by a growing middle class, which in turn is driving demand for certain goods and services. This trend cuts across numerous sectors and is a section of the market that will continue to see a significant amount of regional investment moving forward.

At AIGF, our focus is on the mid-market segment, which means a lot of the companies that we work with are familyrun or founder-led businesses. Some of these companies have managed to grow to an impressive scale but sometimes find it difficult to break out of their current mold, adapt to the rapidly changing environment and reach the next stage. This is where investors such as ourselves can help, by connecting them to new networks and bringing knowledge on best practices.

In the current market, businesses are facing challenges on multiple fronts – from inflationary pressures to the tightening of capital markets. Against this backdrop, there are also significant opportunities to do things differently, from rationalizing their operations and cost structures to making innovations in their business models. Hence, it is even more important for these companies to find the right partners who can value-add in the relevant areas, in order to continue growing.

Over the last few years, the digital transformation of businesses, even in brick and mortar industries, is changing the way that businesses operate today. I think this trend will continue with a lot of companies in the region.

Are there specific sectors that are particularly active in the region?

An important part of our approach at AIGF is to take a step back and deep dive into a particular industry, to get a sense of what the entire value chain looks like. That way, we are able to identify bottlenecks within the industry, and identify areas that are currently underserved and zoom into the right players that are operating within the space.

Broadly speaking, there are several themes that we believe will continue to drive business growth within Southeast Asia. For example, logistics has always been a major trend, driven by a growing middle class fueling demand. The food industry is another, given the importance of both food security and safety.

The COVID-19 pandemic has accelerated both technological adoption and innovation, and that change is something that we are seeing cut across all industries. It has meant that even the more traditional industries have adopted new technologies to improve efficiencies: Industries such as consumer retail, healthcare and education, for example, are leveraging new technologies to deliver more targeted products to consumers. As a result, technology-enabled businesses will remain very sought after going forward.

For example, marrying two of the themes, we recently invested in a specialized logistics company called BHS Kinetic, based in Singapore. They move mission -critical equipment for their clients, and semiconductors is one of the key industries that they serve. The company is working on leveraging automation, among others, to enhance the efficiency and mitigate manpower constraints.

Looking forward over the coming year, what do you see as the biggest challenges to completing deals?

Acquisition financing looks set to be a significant hurdle for deals, with rising interest rates. I definitely see this impacting regional dealmaking going forward.

When investing in Southeast Asia, foreign exchange risk is increasingly becoming a significant risk in several jurisdictions. When a deal is transacted in a local currency and you’re looking at exiting during a time when the exchange rate is not favorable, investors may want to hold back until conditions improve.

Inflationary pressure will continue to be a huge issue in the region. We have seen many companies being hit, with costs going up as much as 50% for some. As an investor, we’ve embarked on in-depth scenario planning and stress-tested the target companies’ projections against these scenarios to assess the risks and rewards of the investment opportunities. This will continue to be an essential part of our investment process going forward. We will also have to expand the scope of our due diligence to get comfortable with our investment thesis and the growth potential in light of the current climate.

Then, of course, we have been hearing a lot of discussions surrounding merger controls across several Asian countries. Earlier this year, Malaysia initiated a public consultation process to see how increased merger controls will impact deals. I don’t think it’s a major issue just yet, but something we will need to keep in the back of our minds as we look ahead.

You mentioned tightening financing conditions across the region. How will this impact private equity firms more generally, and how do you expect them to work around the challenge?

In the past, when interest rates were low, it was easier to pursue a strategy of growth at all costs. In today’s investment climate, we are seeing funds moving back to more value-oriented investment strategies. Value creation is key, as funds need to be very careful as to how they get the best bang for their buck.

From a dealmaking perspective, PE firms will want to be more prudent in the way that they seek growth opportunities. There needs to be a very deliberate approach to this. In today’s climate, we are seeing companies rationalizing their cost structures and divesting certain non-core businesses. If a company’s growth is fueled by high levels of leverage in a highinterest rate environment like now, it can potentially get into a challenging situation very quickly,