A new report from Deloitte titled Rebalancing your portfolio to fuel growth clearly indicates that companies in the Asia-Pacific region need to urgently review their investment portfolios to adjust their investment ratios for growth opportunities and divest non-aligned investments or assets.

This report is based on a survey of strategic goals from organizations undergoing transformation and the factors driving the review of investment portfolios. It involved interviews with 250 senior executives from both private and public companies across the Asia-Pacific region, including Southeast Asia, most of which have revenues exceeding $1 billion.

Five key external drivers necessitating the rebalancing of investment portfolios include:

• Geopolitical tensions affecting the cessation of contacts or transactions with markets, supply chains, and related trade partners.

• Capital efficiency regulations (in Japan, South Korea, and likely extending across Asia) requiring companies to disclose returns on capital that fall below set thresholds.

• Increased investor movements in Asia pressuring companies to rectify underperforming assets and sell non-core businesses.

• ESG (Environmental, Social, and Governance) and the pathway to net-zero greenhouse gas emissions prompting boards and executives to engage in asset trading to transition to a "green portfolio."

• The growing role of funds investing in non-publicly traded company stocks (Private Equity funds) as investors and business partners in decisions to adjust company asset portfolios.

The survey results indicate that proactive portfolio management is becoming essential for executives and boards to adapt to the aforementioned five key external drivers. The findings support the concept of proactive portfolio management focused on building resilience and tangible growth, leveraging growth opportunities and synergies when suitable.

Jiaxie Siu, Leader of Strategy, Risk and Transactions at Deloitte Asia-Pacific, commented on the report, stating, "The drivers reshaping the global economy are having a profound impact on companies across the Asia-Pacific region, whether it be geopolitical tensions, sustainability factors, or investor pressures. Companies must take proactive steps to rebalance their investment portfolios to maintain competitiveness and prepare for asset or business divestitures. Deloitte's report emphasizes the need for a more dynamic investment portfolio review process aligned with the strategic vision of the business for growth and long-term value creation."

ESG is a crucial factor in creating business value.

According to the research, over half of the respondents, or 52%, indicated that ESG issues are being discussed more frequently during M&A negotiations in recent times. Currently, ESG factors play a significant role in companies' strategic decision-making, including the criteria used to evaluate investment portfolios and rebalancing activities.

The impact of ESG on individual companies varies depending on the industry and the company's market position. Companies need to be aware of both the risks (headwinds) and growth and value creation opportunities (tailwinds) arising from an increased focus on ESG. The survey indicates that companies that can clearly link their business plans with ESG factors have the potential to create business value up to six times higher than anticipated.

Exploring alternatives beyond traditional divestitures is gaining popularity.

Almost every company surveyed stated that they are considering strategies for alternatives to traditional divestitures, alongside sales to private equity funds, which reportedly still have substantial uninvested capital with high demand for investments in the Asia-Pacific region. However, companies looking to sell businesses or assets need to adjust their strategies by engaging potential buyers early and being open to a wider variety of deal structures.

Five key approaches businesses should implement:

From the survey of business leaders, most executives, or 79%, expect to sell investments or assets at least twice within the next 18 months. Interestingly, 95% have previously canceled M&A negotiations in the past 12 months, indicating that companies need to be better prepared for divestitures.

“In an era of rapidly advancing technology and increasing emphasis on ESG, proactive portfolio management will be one of the keys to organizational success. We will see mergers and divestitures driven by the need to accelerate net greenhouse gas reductions and/or acquire advanced technologies, making mergers a tool that serves both objectives and profit goals,” said David Hill, CEO of Deloitte Asia-Pacific.

Based on the research analysis, companies should take the following actions:

  1. Continuously apply the concept of investment portfolio review by establishing dedicated oversight units, including governance from the board of directors, to ensure assets align with the strategic direction of the business.
  2. Evaluate investment portfolios based on alignment with strategy, value creation potential, and flexibility. Companies should regularly and comprehensively assess investments against these three factors.
  3. Enhance value from assets misaligned with the company's strategy by communicating compelling business plans and past performance of those assets.
  4. Integrate ESG as a core element in evaluating and rebalancing investment portfolios.
  5. Carefully consider tax implications and opportunities in rebalancing investment portfolios across the Asia-Pacific region.

Muralidhar M.S.K., Managing Director of Strategy, Risk and Transactions at Deloitte Southeast Asia, stated, “Beyond being a best practice for organizations, proactive portfolio management is also a valuable strategy for companies to cope with new regulatory pressures and investor demands. For example, in Singapore, listed companies that have rebalanced their capital structures over the past year have outperformed their peers in the market. Therefore, companies should adapt to ensure their assets align with the overall strategic direction of the organization; otherwise, they may need to act swiftly to divest or partner with allies that can enhance shareholder value and achieve the strategic goals of the business.”