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July 18, 2024
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EY: no ‘significant bounce-back’ in M&A activity even though private equity is still ‘very positive’ about China; Japan, India to lead regional rebound


Mergers and acquisitions (M&A) activity in the Asia-Pacific region is expected to bounce back by around 10 per cent in the second half of this year after a lacklustre 2023, with India and Japan likely to emerge as winners, Yew-Poh Mak, Asia-Pacific strategy and transactions leader at EY, told the Post.

Moreover, global private-equity funds are still “very positive” about mainland China, despite challenges ranging from geopolitical tensions with the West to regulatory uncertainties at home, with investors and businesses eyeing long-term opportunities in the energy transition, consumption, pharmaceuticals and technology sectors.

But while China is seeing strong growth momentum in several sectors, Mak said he did not expect to see “a significant bounce back” in terms of M&A activity, as the private equity industry – the main driver of deals – is still regaining momentum due to regulatory restrictions and a Covid-induced economic slowdown over the past two to three years.

“China is going through a major transition in terms of its economy, where it is [transitioning] from the manufacturing capital of the world into a very advanced economy,” Mak said.

“However, because of geopolitical tensions, China will need to do this transition by itself, rather than getting a helping hand from other advanced economies.”

India is emerging as a clear beneficiary of the geopolitical tensions between China and the United States, with many multinationals eyeing the South Asian country for supply-chain relocation as part of their “China plus one” strategy, Mak added.

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He also pointed out that India, similar to China, is going through a major transition in its economic growth model, with the services industry rapidly emerging as a new driver of gross domestic product in place of manufacturing.

“Indian companies are also very attractive for western companies because of language, favourable policies for [foreign] companies to set up shop in the country … and for its highly skilled labour market,” Mak said.

In Japan’s case, low interest rates and a devalued yen are among key factors that make the country a “very attractive” M&A destination for domestic and international private equity funds, Mak said. Low stock valuations, an ageing population that has caused succession issues and strong shareholder activism are additional reasons that have drawn global investors to the market.

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The recovery in Asia-Pacific deal activity is predicated upon the US Federal Reserve lowering interest rates in May and June, and continuing to do so in the following quarters, he added.

Against this backdrop, several sectors are emerging in China as “major” bright spots for inbound investments and cross-border M&A, including electric vehicles (EV) and the manufacturing of relevant downstream components.

“China is seeing deals in the [EV space],” Mak said. “Companies continue to invest in China, [but] probably a little bit differently than 20 years ago, where their investments [were spread] across many business sectors.

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“Right now, it’s very specific, and multinational companies that are already in China will continue to invest in the market, whereas the less established companies that cannot compete with Chinese competitors at scale may exit.”

Technological innovation has been another key focus for China as the country pivots its economic growth model. However, due to tensions with the West and domestic policy, technology sectors such as artificial intelligence will see more participation from Chinese players, with ecosystems being built “specifically for the Chinese economy”, Mak said.

Another key trend Mak has observed is localisation. As regulation in China continues to be in focus, multinational companies are working with Chinese private-equity firms, state-owned companies and local governments to own shares in their businesses or get more involved in companies’ day-to-day operations.

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“This is happening to companies at scale. So if you think about a company that’s currently listed in the US or London, they’re thinking about ‘do I need a separate IPO in Hong Kong for my China operations?’ [In the meantime,] these companies are inviting other Chinese shareholders to come in as well.”

While China is seeing strong growth momentum in several sectors, Mak said he did not expect to see “a significant bounce back” in terms of M&A activity, as the private equity industry – the main driver of deals – is still regaining momentum due to regulatory restrictions and a Covid-induced economic slowdown over the past two to three years.



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