South-east Asia's private equity and venture capital market saw robust deal flow last year after a subdued 2015, thanks to strong interest in Internet and consumer-related sectors, according to a new report.
Experts at management consultancy Bain & Company and the Singapore Venture Capital and Private Equity Association (SVCA), which jointly released the report, said this year is likely to be another good one for the industry.
They added that rising interest rates are not likely to dampen investor appetites for private equity and venture capital, even as investment prospects across the region remain bright.
But it is also becoming tougher to identify good investments with prices being driven up by mounting competition for deals.
The annual South-east Asia Private Equity Report released on Friday showed private equity investments in South-east Asia soared to US$6.8 billion (S$9.5 billion) last year. This was up from US$4.8 billion a year earlier and 14 per cent higher than the average deal value from 2011 to 2015.
Investments in the Internet sector accounted for a quarter of South-east Asia's total deal value last year. Buoyed by the region's rising middle class, other emerging sectors included agriculture, consumer products, retail, healthcare and education, the report found.
"We're not yet at the peak levels we saw just before or around the global financial crisis, but (deal flow) is coming back," said Mr Suvir Varma, who leads Bain's private equity practice in Asia-Pacific.
A rebound in Malaysia from a record low in 2015 helped spur the rally. The region's deal market remains driven by Singapore, Indonesia and Malaysia, which together made up more than 80 per cent of deal value from 2012 to 2016.
The Vietnamese market is also gaining traction and has received "a lot more attention" over the past 18 months, added Mr Varma.
Investors also saw more successful exits last year. These occur when investors cash out from their investments. Values rose 26 per cent from 2015 as a result of a strong corporate merger and acquisition market as well as five large exits exceeding US$1 billion, compared with just two in 2015.
While growth has been robust, private equity funds in the region are facing mounting competition as new players flood the market, which is keeping prices high. There was a 42 per cent surge in the number of active players in South-east Asia's private equity market from 2011 to 2016, the report found.
"Private equity markets in South-east Asia are steadily improving, due to a larger pool of targets and more robust general partner networks," said Mr Sebastien Lamy, who leads Bain's private equity practice in South-east Asia.
"This healthier momentum has boosted limited partners' expectations for the region, putting private equity firms in a tough spot as they look for new ways to rally against the effects of high prices and heavy competition, coupled with local macro challenges."
To stand out, private equity firms are increasingly looking for new ways to add value to their investments - for instance, through deeper strategic involvement in investee companies, Mr Lamy added.
Dr Jeffrey Chi, the chairman of the SVCA, said valuations are rising in the venture capital sector but "there is no lack of capital moving in to participate". Still, "some caution needs to be exercised as over-valuation is a risk", he added.
The industry is on track for another strong year in 2017, said Mr Varma. While interest rates are expected to start inching up - which would raise borrowing costs and make money harder to come by - Mr Varma does not expect this to cool the private equity and venture capital markets.
"(As long as) we're in an environment where base case returns in other asset classes, like fixed income and equities, remain muted, as they have for the last few years, (investors) will continue to feel that it's worthwhile paying for the added risk and illiquidity of (private equity)," he noted.
But Dr Chi also flagged longer- term challenges in South-east Asia's capital markets.
For instance, more could be done to make it more attractive for high-growth tech firms to list on the Singapore bourse, while also educating retail investors about such companies, he said. An initial public offering is one way for venture capital or private equity investors to exit their investments.
Dr Chi, who is also the managing director of venture capital firm Vickers Venture Partners, said: "Will our own unicorns necessarily decide to list in Singapore? It's a big risk for a company to list on an exchange without a track record.
"Also, is the investor base open to it? That's a longer-term issue which involves education."