PE Firms Return to Cash Flow-Positive Investments, P&I Reports

What's happening: Private equity firms are shifting their investment focus back to cash flow-positive businesses, marking a return to traditional PE strategy, according to top executives from Temasek-backed asset managers speaking to Pensions & Investments.

Why it matters:

• Market shift: The opening of capital markets and moderating inflation signal better PE exit opportunities ahead

• Strategy pivot: After years of chasing high-risk growth investments, firms are prioritizing resilient businesses that generate steady cash flows

• Regional focus: Southeast Asia's mid-market segment is emerging as a particularly attractive opportunity zone

The key moves:

• Valuation reset: PE firms are seeing multiples trend downward, making deals more attractive after a period of high valuations

• Market targeting: Investors are focusing on small-cap and mid-market companies, which used less leverage and weathered interest rate increases better

• Geographic expansion: Firms are increasingly looking at Southeast Asia's 70 million SMEs, which contribute 45% of the region's GDP

By the numbers:

• Growth contrast: Venture capital deployment grew at 17.8% CAGR (2013-2018) vs 6.2% for traditional PE

• Market size: Temasek manages S$389 billion ($287.9 billion) in assets

• Portfolio scale: Seviora Group oversees $50 billion, while Azalea Investment Management manages $11 billion

Key players:

• Jimmy Phoon: CEO of Seviora Group, emphasizing return to traditional PE principles

• Dickson Loo: Managing Director at SeaTown, highlighting Southeast Asian opportunities

• Chue En Yaw: CEO/CIO of Azalea Investment Management, focusing on small-cap advantages

Key quotes:

• Market outlook: "I'm optimistic that with inflation moderating and interest rates (being supportive of) the stock market, this will provide IPO opportunities" - Dickson Loo

The wrap: This strategic shift represents a significant return to PE's fundamental principles, with firms prioritizing stable, cash-generating businesses over high-risk growth plays. The focus on Southeast Asia's mid-market segment suggests a maturing market that could define PE's next growth phase.