New Deloitte report: Companies across Asia Pacific face urgent need for portfolio rebalancing; 79% of executives expect to make two or more divestments in the next 18 months

BANDAR SERI BEGAWAN, 15 July 2024 - A new Deloitte Asia Pacific report highlights an urgent need for companies across Asia Pacific to increase scrutiny of their portfolio holdings as they seek to rebalance for growth opportunities and divest assets that no longer fit their strategy.

The report surveyed 250 executives across the Asia Pacific region from private and public companies, including Southeast Asia, most with revenues over US$1 billion, on their evolving strategic goals and the forces driving portfolio reviews.

Five key external forces are driving this need for portfolio rebalancing:

• Navigating geo-political tensions causing dislocation of marketplaces, supply chains and trade partner
• Capital efficiency regulation (Japan, Korea and likely the rest of Asia) requiring companies to disclose capital returns below the threshold
• The rise of investor activism in Asia putting pressure on companies to address underperforming assets and divest non-core businesses
• ESG and the road to net zero triggering boards and executives to undertake deals and divestments to transition to a “green portfolio”
• Private equity’s increasing role as an investor and potential partner in asset portfolio optimisation choices

The survey found that active portfolio management is becoming pivotal for how executives and boards are adjusting to these external forces. The report advocates a move towards an “active portfolio management mindset”, focused on building resilience and transformative growth through capitalising on growth opportunities and synergies as and when they arise.

Commenting on the report Jiak See NG, Deloitte Asia Pacific’s Strategy, Risk and Transactions Leader said, "The forces reshaping the global economy are profoundly impacting companies across Asia Pacific. Whether it's geopolitical tensions, sustainability imperatives, or investor pressures, businesses must be proactive in rebalancing their portfolios to remain competitive and divestment ready. Deloitte's report underlines the need for a more dynamic portfolio review process that aligns with businesses’ strategic vision for long-term growth and value creation.”

ESG is a critical deal-value driver

According to the research, more than half (52%) of the survey respondents reported that ESG considerations were frequently discussed during their most recent divestiture. ESG factors now play a central role in companies’ strategic decision making, including shaping the criteria by which they assess their portfolios and rebalancing activities.

The impact of ESG on individual companies varies widely by sector and their market position. Companies need to be alert both to the risks (headwinds) and the growth and value opportunities (tailwinds) that a growing focus on ESG concerns brings, and the survey suggests that sellers with a clear ESG story are six times more likely to receive a higher-than-expected deal value.

Alternative exits grow in importance

Almost all respondents are now considering alternative exit strategies alongside conventional divestment with private capital, and private equity, to the fore. Record levels of dry powder mean that private equity buyers are hungry for investment opportunities in Asia Pacific, though sellers need to adapt their approach, engaging potential buyers earlier in the process and being open to a wider range of deal structures.

Five key actions for businesses to adopt

Among the business leaders surveyed, the vast majority (79%) of executives expect to make two or more divestments in the next 18 months. Interestingly, 95% have abandoned a sale in the last 12 months, suggesting a need for businesses to do more to be divestment ready.

“In an era of exponential technology and a heightened focus on ESG, active portfolio management will be one of the keys to corporate success. We will increasingly see acquisitions and divestments driven by a desire to accelerate decarbonisation journeys and/or to acquire advanced technologies, making M&A an enabler of purpose as well as profit goals,” added David HILL, Deloitte Asia Pacific’s CEO.

Based on the analysis of the report findings, businesses are encouraged to take the following high-impact actions:

1. Adopt an ‘always-on’ mindset for portfolio reviews, dedicating resources and board-level oversight to align assets with the business’s strategic direction.
2. Assess portfolios on their strategic fit, value creation potential and resilience. Companies should apply this tripartite “advantaged portfolio” review frequently and comprehensively.
3. Maximise value from poor-fitting assets by developing a compelling story and asset track record.
4. Integrate ESG as a central component of portfolio assessment and rebalancing.
5. Carefully consider tax implications and opportunities in portfolio rebalancing transactions across the Asia Pacific region.

Muralidhar M.S.K., Deloitte Southeast Asia’s Strategy, Risk & Transactions Regional Managing Partner, said, “Apart from being a good corporate practice, active portfolio management is a valuable strategy for companies to address new regulatory and investor pressures for resiliency. In Singapore, for example, listed companies that have rebalanced their capital structures in recent years have outperformed the market. Companies should therefore stay nimble and ensure that their assets are aligned with their overall strategic direction. If they are not, companies should be willing and able to move quickly to divest or engage with partners who can help them maximise value for shareholders and achieve their strategic objectives.”

To access the full report and learn more about the findings, please visit https://www.deloitte.com/global/en/offices/apac/perspectives/portfolio-rebalancing.html

Methodology

Between 21 March and 5 April 2024, a Deloitte survey conducted by OnResearch, a market research firm, polled 250 executives who had been part of a divestiture within the preceding 36 months to gauge their expectations on divestiture activity in the upcoming 12–18 months, as well as their experiences with recent divestitures. All survey participants work either for private or public companies with revenues in excess of US$500m. More than half (55%) of respondents represented firms with more than US$1bn in revenue. The participants hold senior ranks (senior director or above at the corporations). Most of the respondents (80%) sit within the C-suite. Respondents’ companies are headquartered in eight Asia Pacific countries/regions (Australia, New Zealand, Japan, Korea, China, Taiwan, India and Southeast Asia) and each country/region is represented by a statistically viable sample of responses.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms, and their related entities (collectively, the “Deloitte organization”). DTTL (also referred to as “Deloitte Global”) and each of its member firms and related entities are legally separate and independent entities, which cannot obligate or bind each other in respect of third parties. DTTL and each DTTL member firm and related entity is liable only for its own acts and omissions, and not those of each other. DTTL does not provide services to clients. Please see www.deloitte.com/about to learn more.

Deloitte Asia Pacific Limited is a company limited by guarantee and a member firm of DTTL. Members of Deloitte Asia Pacific Limited and their related entities, each of which is a separate and independent legal entity, provide services from more than 100 cities across the region, including Auckland, Bangkok, Beijing, Bengaluru, Hanoi, Hong Kong, Jakarta, Kuala Lumpur, Manila, Melbourne, Mumbai, New Delhi, Osaka, Seoul, Shanghai, Singapore, Sydney, Taipei and Tokyo.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited (“DTTL”), its global network of member firms or their related entities (collectively, the “Deloitte organization”) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.

No representations, warranties or undertakings (express or implied) are given as to the accuracy or completeness of the information in this communication, and none of DTTL, its member firms, related entities, employees or agents shall be liable or responsible for any loss or damage whatsoever arising directly or indirectly in connection with any person relying on this communication.

© 2024 Deloitte Southeast Asia Ltd.