Data analytics and consulting firm GlobalData revealed last week that during the first seven months of 2023, the Asia Pacific (Apac) region witnessed a 20.4% year-on-year decrease in mergers and acquisitions (M&A), private equity (PE) and venture financing deals.
In total, 8,457 deals were announced within the region from January to July 2023, compared with 10,626 during the same period last year.
Within the three sub-categories, the number of M&A, PE and venture financing deals dropped respectively by 10.9%, 7.8% and 28.7% in the same timeframe.
“The slowdown in dealmaking in Apac tracks a general global trend, and factors which affect dealmaking globally, such as interest rates, continued inflation and geopolitical tensions, also apply to the region,” Siew Kam Boon, partner at global law firm Dechert in Singapore, told FinanceAsia.
Several upcoming elections in the region also add to macro uncertainties, she said.
PE firms investing in Apac were tightening investment requirements in this environment because of the pressure to deliver higher returns because of the higher cost of capital, inflation, the perceived local country risks and the concerns around exit options in the coming years, Boon explained.
“We expect to see more divestments of underperforming businesses from companies who are looking to improve cost management and efficiency,” she said. “These present a good opportunity for add-on acquisitions, consolidation efforts or a go-to-market strategy for PE firms or companies with a buy & build strategy.”
On the VC funding end, "higher interest rates increase the discount rate for all risky projects, leading to fewer deals getting done,” Chris Kaptein, managing partner at Southeast-Asia-focussed venture capital fund Integra Partners, told FA.
“This is a welcome adjustment from the past few years, where capital was so cheap that supply of money far outpaced the number of quality companies looking for funding. Great companies will have no shortage of investors to partner with, but there is a healthier balance between that supply and demand today.”
Kaptein expected this trend in the VC funding sector to persist for a while longer.
“The real litmus test for the region remains exit liquidity, and a return on capital for the limited partners (LPs) who have backed the venture capital market in the last ten years or so,” he noted.
“It is one thing to book paper gains in a market that seems to move in one direction only. It is another to deliver cash returns back to investors consistently.”
Report from Sydney-based software-solutions provider Ansarada also showed a 21% decrease in M&A activity during financial year 2023, together with increasing M&A deal durations.
Sam Riley, chief executive officer (CEO) at Ansarada, told FA that rising interest rates and depressed valuations, among uncertainties in the macro environment, contributed to the overall conservatism among M&A dealmaking parties.
“On the buy side, there's more conservatism and increased [due] diligence [efforts]. On the sell side, they are waiting for a better environment to get a higher valuation,” he said.
In the meantime, energy M&A deals outperformed its sector peers, seeing a 100% quarter-on-quarter increase in deals in Q2.
Riley pointed to the consolidation of traditional energy generation sectors and a rising capital raising in renewable energies. Financial services is another sector that stood out, with a 37% quarter-on-quarter increase in deals, according to Ansarada’s data.
Boon from Dechert agreed that emphasis at this stage should be on certain sectors, instead of markets by country.
“We are still tracking creative activity and structures in sectors associated with megatrends such as technological innovation, digitalisation and the energy transition, as well as in the resilient healthcare sector which does well against the specific structural issues in Apac,” she said.
AI opportunities
In light of the uncertainties posed by the macro environment, Riley told FA that he believes emerging technologies like artificial intelligence (AI) could better equip dealmakers with efficient analytical capabilities.
Comparative analysis of different scenarios, due diligence performance, and acquisition evaluation would be able to benefit both buy side and sell side, saving them a great amount of time to look at more opportunities more frequently.
“AI can help a company present itself in the best light instead of finding out risks near the end of a deal,” he said. “AI lets companies be a lot more proactive in addressing potential risks upfront.”
Moreover, the technology would possibly offer adaptive insights to better prepare for uncertainties in the macro backdrop and test out corporates’ resilience in face of various scenarios.
“You might still reach the conclusion that we have to wait for the macro events based on the very sophisticated AI work. Or you might say the macro doesn't matter as much we as we thought it did,” he said.
“Training the AI to model out different scenarios, to understand the risk better, quicker, faster, and cheaper will lead to more confidence, which is the number one thing people require for more activity.”
