In spite of some macro turbulence, the Asia Pacific private equity (PE) deal market posted a record year overall in 2015. However, country by country, the story was not as promising everywhere. In Southeast Asia (Singapore, Thailand, Indonesia, Malaysia, Vietnam, and the Philippines), PE remained restrained with economic uncertainty, rich valuations and high competition keeping investors on the hook as they waited for a payout. According to Bain & Company’s Southeast Asia Private Equity Report 2016, this subdued climate is likely to continue. As the current economic expansion nears its seven-year anniversary and signs of instability are beginning to appear, investors must weigh future recession risks and focus on adapting for tumultuous times if they want to realize significant returns. Bain’s report finds that deal value in Southeast Asia slid to US$4.2 billion in 2015 – about one-third of the five year average – delivering its worst showing since 2004. Deal count dipped from 59 in 2014 to 43 last year. Only Singapore and Indonesia bucked this trend, leading the region with 29 deals that made up 90 percent of total deal value. About 30 percent of deals in Southeast Asia last year were in the Internet sector, with deal count and value about 2.4 times higher than the previous five-year average. Exit value improved compared to 2014, but at $6.7 billion was slightly below the 2010-14 average. A bumpy IPO market and volatile macro context also hindered exit activity, which was 35 percent below historical levels, except in Singapore, where activity remained mostly on par with the previous year. “Investors in Southeast Asia spent much of 2015 hoping that it would be the expected region’s break out year,” said Sebastien Lamy, who leads Bain’s Private Equity Practice in Southeast Asia. “While fundamentals in the region remain strong and sellers are increasingly opening up to the PE value proposition, PE funds could not put their capital to work as much as they wanted.” According to Bain, it will take time before funds fully benefit from their developing networks, and the market would need to see manageable pricing, sustainable return stories and improved geopolitical conditions before momentum improves. Within the region, a number of country-specific challenges made it difficult to conclude deals on the ground. Competition and a small pool of assets plagued investors in Singapore. In Thailand and the Philippines, the uncertain political and economic environment did little to reassure PE funds, whereas in Indonesia, Vietnam and Malaysia, sellers’ price expectations tamped down deal count. “Regardless of economic headwinds and regulatory inconsistencies, which remain clear hurdles in Indonesia, general partners are more optimistic about the PE environment here, due in part to government policy,” said Usman Akhtar, a partner in Bain’s Indonesia Private Equity Practice. “PE deal momentum was strong in 2015, particularly in the venture capital bucket.” Overall, PE funds believe that sellers are warming up to PE across the region. Bain surveyed 125 private equity executives in Asia-Pacific and found that almost 38 percent of respondents believe they have a good or very good understanding of the PE proposition, and about 75 percent feel the PE environment is improving. Bain also sees a continuous shift towards ‘control,’ with PE funds expecting to get control provisions in minority deals in almost half of the cases in the next 2-3 years for Southeast Asia, versus a third for the past 2-3 years. Looking ahead, however, it will be even more difficult for investors to realize outsized returns as the market matures, volatility increases, and the pool of potential targets remains small. According to Bain’s survey, approximately 70 percent of respondents expect competition for deals to either increase moderately or significantly. As a result, prices are on the rise – with an 11.5x median EV/EBITA multiple on regional M&A transactions in 2015, compared to 9.6x for last five year average. “PE funds need to be well prepared to survive the inevitable bumps in the road ahead,” said Suvir Varma, who leads Bain’s Private Equity Practice in Asia-Pacific. “In our experience, the leaders in Southeast Asia take an activist approach. They adopt mindset of value creators, not acquirers, which means having clear insights, quality due diligence and discipline in pricing assets, all of which are key to mobilizing the right value-creation strategy and executing on it.” Through its extensive research on the private equity market in Southeast Asia, Bain found that most successful funds focus on three specific areas to survive the turbulence: 1) They have storm-proofed their portfolios by dialing up their focus on portfolio activism, investing heavily in the people and capabilities needed to both maximize the value of their highest-potential companies and generate the most compelling growth stories upon exit. 2) They are sourcing from a position of strength by targeting the most resilient sectors, sharpening due-diligence to best anticipate potential downside risk, and devising early, robust strategies for margin improvement, incremental revenue growth and exit planning. 3) They are reorganising internally to devote more talent and resources to fixing companies and build a battle-ready organization companies. They are also adding depth to investment committee processes by including specialists and others in the portfolio review process, while creating stringent guidelines to focus resources where it matters most.