High growth sectors look set for strong 2025 in South East Asia

The M&A landscape in South East Asia experienced a relatively muted period in 2024. The dampened deal-making sentiment over the past few years can be attributed to several factors, including a wide bid-ask spread, weaker capital markets backdrop, and an unwillingness among regional corporates to yield control. However, underlying trends indicate a resurgence in M&A activity in the region as we look ahead to the rest of 2025.

The M&A landscape in South East Asia experienced a relatively muted period in 2024. The dampened deal-making sentiment over the past few years can be attributed to several factors, including a wide bid-ask spread, weaker capital markets backdrop, and an unwillingness among regional corporates to yield control. However, underlying trends indicate a resurgence in M&A activity in the region as we look ahead to the rest of 2025.

Current Challenges in the M&A Landscape

1.       Bid-Ask Spread Dynamics

One of the primary challenges in the current M&A environment is the wide bid-ask spread. Asset valuations have significantly declined from the highs seen during the pandemic's low-interest rate era. With the subsequent interest rate hikes, buyer expectations have adjusted downward, while sellers have been slower to moderate their price expectations. This disconnect has created a challenging environment for deal-making.

2.       Weak Capital Markets

The capital markets in South East Asia have also contributed to uncertainty of M&A activities. IPO activity has yet to recover, with aggregate IPO volumes plummeting approximately 81% from the 2021 peak of USD 13.5 billion to just USD 2.6 billion in 2024. This decline has further dampened investor sentiment and made sponsors more cautious about pursuing new deals.

3.       Corporate Control Issues

Regional corporates are often reluctant to relinquish control, particularly in sectors where sponsors are eager to manage assets directly, such as renewables and digital infrastructure. This reluctance has hindered potential M&A transactions, especially in a market characterized by significant strategic interests

Positive Trends Supporting Future M&A Activity

Despite these challenges, several underlying trends are emerging that could support M&A activity in South East Asia as we journey through 2025.

De-averaging reveals that sectors with higher valuations, reflecting strong underlying growth trends and investment mandates, experienced stronger M&A activity in 2024. Key sectors, including Financials, Technology, Media, and Telecommunications (TMT), Industrials, and Healthcare, are expected to continue attracting attention. After peaking in 2021, M&A multiples have stabilized around mid-cycle levels, indicating a potential for renewed activity.

Several notable digital infrastructure assets have recently come to market, illustrating this trend. For example, KKR and Singtel announced a USD 1.3 billion investment in STT GDC from ST Telemedia in June 2024, following KKR’s commitment of USD 800 million in Singtel's regional data center business which was announced in September 2023.

Marketed assets such as this case have generated strong investor enthusiasm, reinforcing expectations for continued growth in the digital infrastructure space. Additionally, notable mergers among regional telecommunications companies, such as XL Axiata's merger with Smartfren in Indonesia and Gulf's amalgamation with Intouch in Thailand, highlight the ongoing trend of corporate restructuring and market consolidation.

Looking ahead, several factors indicate a more favorable investment climate in South East Asia:

• With the US Federal Reserve beginning a rate cut cycle and central banks in Asia likely to follow suit, we expect investment activity and volumes to increase in 2025, driven by lower financing costs.
• South East Asia remains attractive due to relatively lower market valuations, alongside expectations of accelerated growth from rising exports and normalized tourism, despite uncertainties related to international tariffs.
• There is increasing interest from global MNCs, as well as Japanese and Chinese strategics looking to drive regional deals from Singapore.
• Financial sponsors are under pressure to return capital, which will drive exits for a backlog of portfolio companies. As bid-ask spreads continue to narrow, there is also a strong incentive to deploy stockpiled dry powder, particularly in themes like energy transition, digital infrastructure, and climate initiatives.
• Sovereign wealth funds with mandates to develop local businesses and critical industries also remain active participants in the market.

In addition to the previously mentioned sectors (Healthcare, TMT, Industrials, and Financials), several areas are expected to see increased activity:

• Sustainability and Clean Energy: With businesses prioritizing sustainability and especially with the region’s growing energy needs, numerous activities within the renewable energy space are expected to increase. Regional corporates and sponsors are setting ambitious ESG targets and raising substantial funds for infrastructure and climate investments, although the availability of attractive and scalable assets for inorganic growth remains limited. The environmental services involving waste management and water treatment will also see consolidation and sponsor activity.
• Logistics and Supply Chain Resilience: The lessons learned from the pandemic have prompted an active pursuit of logistics and supply chain management assets to enhance resilience against supply chain shocks.
• Education Platforms: The education sector is gaining traction, with private equity firms actively expanding education platforms through school acquisitions in Singapore and Vietnam, driven by a fragmented market structure that presents opportunities for consolidation and value creation.

Overall, markets appear to be signaling an all-clear sign following a turbulent boom-bust cycle reminiscent of the global financial crisis. With lower interest rates expected to continue through 2025, combined with reduced market volatility and a more favorable regulatory environment under the new US administration, both sponsors and strategics are likely to pursue deals more aggressively than in recent years.