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       PETALING JAYA: With the global economic recovery and gradual easing of travel restrictions, private equity (PE) firms are set to strike deals in the South-East Asian region, including Malaysia.

       Despite the uncertainties brought about by the emergence of new Covid-19 variants, investment bankers and professional services consultancies expect the domestic PE market deals for this year to outperform those of last year.

       PE is an alternative investment class and is composed of funds and investors that directly invest in private companies, or engage in buyouts of public companies.

       Maybank Investment Bank head of advisory Reza Mohd Zin told StarBiz that the gradual easing of restrictions on travel and social interactions would enable more deal-making activities such as face-to-face meetings, site visits and due diligence to be carried out.

       The difficulties in carrying out such activities during the pandemic were frequently cited by the PEs as impeding their transactions, he said.

       The consumption trend, which was impacted during the pandemic, is expected to rebound benefiting sectors such as retail, consumer goods, healthcare, education, and business services.

       “We expect the sectors to continue to attract PE interest in 2022 and beyond, particularly those with distinct advantages such as reach, value to customers and convenience like e-commerce.

       “The pandemic has also accelerated the adoption of technology and Internet connectivity by these sectors, and PE investors are looking for businesses that have the potential to or have already leveraged on technology to expand their market reach, increase scale efficiencies and accelerate the value creation.

       “There have been highly-publicised South-East Asian based regional technology/Internet champions emerging in recent years, and we believe that PE firms will be looking out for the next ‘unicorn’,” Reza said.

       Based on the data from Dealogic for 2021 (extracted on Jan 3, 2022), deal value from PE-related merger and acquisition (M&A) transactions in Asean saw Singapore at the top spot with US$4.7bil (RM19.8bil), followed by Indonesia, Malaysia, Vietnam and the Philippines. Malaysia was ranked third with a total deal value of US$553.1mil (RM2.3bil) with four M&A deals involving PE firms.

       OCBC Bank (M) Bhd managing director, senior banker and head of investment banking, Tan Ai Chin said PE investors would continue to form a very important buyer group for M&A transactions in 2022.

       Globally, PE firms are sitting on a significant amount of dry powder, at reportedly US$2.3 trillion (RM9.6 trillion), causing fierce competition for high-quality assets.

       This year is expected to be a recovery year for Malaysia, and PE investors will be riding on the wave of the recovery play.

       The global economic recovery, especially in commodity prices, has boosted confidence of investors to pour additional capital into PE funds, she noted.

       Dry powder refers to unspent cash reserves which have yet to be invested.

       “We continue to witness strong interest of the PE for high quality assets in sectors such as healthcare, medical-technology and pharmaceuticals, consumer/retail, food and food-related, manufacturing/advanced manufacturing and education.

       “A key theme moving forward will be the level of technology in place and being employed in the PE target companies, as well as the environmental, social and governance (ESG) story, which has become a critical component of the deal process,” she said.

       Deloitte Malaysia mergers and acquisitions leader Yap Kong Meng said PE firms are increasingly motivated to complete more a deals.

       However, he said it is difficult to ascertain if there would be more PE buyouts in Malaysia in 2022 since many PEs are regionally-focused and pandemic-related distortions continue to create some uncertainties for businesses. The uncertainties include constant tightening or loosening of international travel movement restrictions, commodity and raw material price spike and international supply chain challenges.

       On the challenges facing the domestic PE market, Yap said: “There are numerous challenges. One of it is the uncertainties for PE firms in exiting portfolio companies negatively impacted by the pandemic.

       “The other is the valuation gap caused by the disagreement between PE firms and vendors on the sustainability of profit levels of the target businesses which have been benefiting from the effects of the pandemic. Strong initial public offering could also drive deals away from PE firms particularly for minority stake deals.”

       Preman Menon, who is the Malaysia Strategy and Transactions Leader in Ernst & Young PLT, said one of the key challenges in the domestic market, is the valuation expectations, particularly in businesses which feature within the digital economy.

       Seller-investee valuation expectations continue to be high and benchmarked against larger economie.

       “For companies to command these valuations they will need to demonstrate how they are able to grow their business beyond the Malaysian shores.

       “A further potential challenge will be around ESG adoption. It features prominently in both investing and fund-raising at the PE fund level. The level of awareness locally has perhaps outpaced adoption, certainly in a number of entrepreneur-led businesses,” he said.

       Preman said while businesses may be strong financial performers, the lack of ESG adoption would make for a difficult investment case.

       Maybank Investment Bank’s Reza said past challenges would continue to be a concern with regard to the PE market.

       They include the availability of suitable investment targets, and competition among PEs and family offices in chasing such investments.

       “What this does is to bid up prices and sellers’ expectations, hence resulting in deals failing,” he noted.

       OCBC’s Tan said if Bank Negara were to raise interest rates, the environment would become less conducive for deal-making, resulting in acquisition financing becoming more costly to the PEs.

       Furthermore, special purpose acquisition companies (SPACs) may start to give the PEs a run for their money, especially in light of the enhancements made to the SPAC guidelines to facilitate greater access to fundraising in Malaysia.

       “Issues such as industry supply chain disruptions, raw material shortages and rising prices, sustainability of earnings and geopolitical risks will continue to feature prominently as key concerns.

       “In addition, competition between PE firms for high quality assets may drive prices up and exert pressure on the PE market,” she added.