An abridged version of the article was published in IFLR on November 21, 2023.

Deal volumes continued to slide in Asia over the first half of 2023, with Asia facing its own set of challenges in addition to those present at the global macroeconomic level. However, there are a number of key opportunities in Asia that have begun to drive growth in the second half of 2023 which we expect to continue into the future.

Global issues affecting dealmaking in Asia

As with the rest of the world, Asia is facing persistent core inflation, rising interest rates, and greater geopolitical tensions than those seen over the past two decades. Each of these factors naturally inhibit dealmaking – inflation generally weakens buying power, rising interest rates reduce the likelihood of borrowing money to finance deals, and an increase in geopolitical tensions runs the risk of countries and companies turning inward and away from cross-border deal making.

However, some positives can be taken in Asia – the levels of inflation and interest rate rises here have, on the whole, not been at the levels seen in parts of Europe and the United States, and Asia may be somewhat insulated from the effect of interest rate rises as dealmaking here often relies less heavily on traditional bank loan financing than, for example, the United States.

Asia-specific issues affecting dealmaking in Asia

In addition to global issues affecting dealmaking in Asia, there are a number of Asia-specific perceptions that can inhibit dealmakers. These include foreign direct investment regulations (though such regulations are increasingly seen outside of Asia), political uncertainty, and a perceived lack of transparency from counterparties during the dealmaking process.

In a report on M&A recently released by Norton Rose Fulbright and Mergermarket, 65 percent of respondents expected foreign direct investment regulations to be a key suppressant of dealmaking activity in Asia, more than in any other region. However, it should be noted that whilst these regulations are intended to protect key sectors in certain Asian jurisdictions from cross-border acquisitions, the majority of these regulations have been in place for a number of decades and we have, during that time, seen significant growth in cross-border investments in Asia notwithstanding such regulations. Additionally, many investors based overseas enter joint-venture arrangements in Asia to leverage the expertise of their local partners in Asia and therefore may be less concerned with such regulations than would appear at first sight. In any event, the trend in recent years has been a relaxation in foreign ownership limits – for example, the recent relaxation of foreign ownership limits in certain renewables projects in the Philippines.

In terms of political uncertainty, there are a number of elections that are due to take place, or have taken place, in Asia in 2023 including in Thailand, Cambodia, and Pakistan, and there is an upcoming general election in Indonesia in early 2024. Election years in Asia often have a dampening effect on M&A in the relevant country as investors take a "wait-and-see" approach. We would expect this to be the case, for example, in Indonesia in late 2023 and early 2024. Once the "wait-and-see" period comes to an end, we often see a return to pre-election dealmaking levels within six to twelve months, and we think that this can be expected in Thailand following this year's election. However, it should be noted that there is ongoing turbulence in Myanmar which has stifled inbound investment into the country over the past two years and has seen a number of large multinationals exit the country. This may make a return to the levels of cross-border investment Myanmar enjoyed in the 2010s unlikely for the foreseeable future.

Finally, in terms of transparency during the dealmaking process, 41 percent of respondents in our report cited poor levels of transparency from counterparties as being a deterrent for those doing deals in Asia. Whilst this may be of concern to dealmakers, we do note that there has been a progressive trend towards an increase in transparency in dealmaking in Asia, and that cross-border dealmakers investing in the region tend to take a pragmatic risk-based approach to dealmaking, obtaining greater contractual comfort to address such perceived lack of transparency than they may otherwise be able to obtain elsewhere in the world. However, recent legislation and events are having an impact on the willingness of dealmakers, particularly from certain jurisdictions, to transact in the PRC.

Key opportunities in Asia likely to drive growth in the final months of 2023 and into the future

Notwithstanding the global and Asia-specific issues mentioned above, Asia retains its potential for future M&A growth.

We expect to see continued growth in investments in Asia in the renewables space, with Southeast Asia in particular becoming a popular choice in part due to some countries in the region, for example, Vietnam, seeking to implement clearer rules and regulations and encouraging investment alongside established local partners in the sector. Taiwan is also seeing significant inbound investment in its offshore windfarm projects and we anticipate similar trends developing in countries in Southeast Asia as legal frameworks are put in place.

The market is also seeing continued overseas direct investment by Japanese corporates, and the general global push towards decarbonisation is being seen in Asia as well, including in the form of nickel deposit related investments in Indonesia with such deposits being used in the electric vehicle supply chain.

Importantly, Asia's demographics present a significant opportunity for financial institutions and related businesses over the coming years – a burgeoning young middle-class is likely to look to increasing their levels of personal investments and spending more on insurance and healthcare. Dealmakers may attempt to capitalise on this with investments into health and insurance related technology companies that are entering the market in many Asian countries.

Finally, a number of countries in Asia are focusing on ensuring that their economies have well-developed digital infrastructure in place, and we expect there to be significant growth in investments in this area as nations seek to future-proof their infrastructure and economies.

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