Outlook for Asia Pacific M&A Dealmaking Is Fueled by ESG

Asia Pacific (APAC) displays a mixed bag for mergers and acquisitions (M&A) growth going into Q2 2022. However, there are some commonalities, beginning with the influence of private equity (PE) as well as lingering by-products of the COVID-19 pandemic and the trend of environmental, social and corporate governance (ESG).

In Australia-New Zealand (ANZ), M&A activity has already picked up in Q1 2022 and is expected to continue into Q2. South Korea has a robust quarter ahead with billions of dollars in deals awaiting close. In Southeast Asia, investment banks are leading the way to a bright outlook.

China and Japan tells a different story. Growth is sluggish in China, due to the pandemic, ongoing Sino-U.S. tensions and reliance on the huge domestic market to maintain economic growth. Any growth is driven by investments in New Energy, Semiconductor and Life Sciences, divestitures and spin-offs of foreign brands and a restructuring of the Real Estate market. 

PE is driving up prices for attractive assets in Japan. Pandemic-hit companies in the country are making sales to improve balance sheets, with PE funds becoming the main buyers.

In South Korea, PE is increasing fund sizes and will exercise more power in the market. Extending beyond South Korea and into Southeast Asia, though, the obstacle becomes regulatory changes and rising valuations. 

We go over the other trends driving APAC growth in the SS&C Intralinks Deal Flow Predictor for Q2 2022 — the independently verified resource outlining M&A activity across the globe based on new deal starts.

Competition remains stiff

Due to high amounts of dry powder, the market for qualified assets is extremely competitive in places like ANZ, Southeast Asia and China, where PE and SPAC investors are having a field day. Healthcare and Tech are attracting the most attention in Japan, with notable VC interest in the market. In South Korea, however, rising interest rates are making competition for cream-of-the-crop opportunities even tougher. In terms of opportunities, we see Energy as a sector to watch across several APAC regions, including China, Southeast Asia and ANZ.  

In China, the Real Estate, Life Sciences, Consumer & Retail and Semiconductor sectors are budding. In Japan, consumers continue to drive deal activity with Retail, Leisure and Transportation worthy of note. The expected staples of Tech and Healthcare are strong here, as well as in Southeast Asia. The Financial landscape is showing promise as a hotspot in South Korea.

Unsurprisingly, ESG is the most talked about, across-the-board opportunity. With COP26 building momentum to shift more economies towards net zero carbon emissions, we are seeing Renewable Energy showing major growth potential across China, South Korea and Southeast Asia, as many companies latch on to the global trend of ESG responsibility.

Post-pandemic optimism?

The mood among clients in APAC is one of transition from the depths of the COVID-19 crisis. In ANZ, there’s excitement, with people returning to the office. This burst of energy may translate into a flurry of dealmaking opportunities.

Even with the recent surge in COVID-19 cases in Japan and China, domestic dealmaking remains strong — with the exception of cross-border deals. Dealmakers in South Korea see 2022 as tougher than previous years, but the market will stay favorable this year with hope for a subsiding of the pandemic.

Obstacles in the midst 

COVID-19 travel restrictions are still an issue in ANZ and China, even though a lot of dealmaking can be done digitally. China is also hampered by heightened policy and government interference on issues such as anti-monopoly, Personal Information Protection Law (PIPL) and data security.

Looking across APAC, there are many challenges afoot. Initial public offerings (IPO) activity, once strong in Japan, has weakened, leading Japan's SBI Sumishin Net Bank to postpone a planned USD 1.2 billion IPO in March due to the market downturn triggered by the instability of the global political stage. Southeast Asia faces high inflation, and financing costs across their infrastructures will be one of the key drawbacks in progressing strategic initiatives. While growth is expected, pockets of resistance will require dealmakers to be extra creative.