2018 in Asia: The rise and rise of mega-funds

Record fundraising by pan-Asia buyout funds, less China state-backed dealmaking and a sharp drop in the country's outbound M&A were key themes.

As 2018 draws to a close, Private Equity International takes a look back at the biggest investment and fundraising themes and forces that dominated Asia’s private equity market.

Funds got raised

Fundraising volume in Asia in 2018 reflected a consistent theme of higher levels of capital raised across global markets. Fundraising focused on the continent hit $37.8 billion from January to September 2018, surpassing the $37.7 billion gathered in calendar year 2017, according to PEI’s Q3 2018 Fundraising Report. Hillhouse Capital Group amassed $10.6 billion for its Fund IV, the largest ever private equity fund dedicated to the region. The Carlyle Group gathered $6.55 billion for Asia Partners V and Hong Kong-headquartered PAG secured $6.1 billion for Asia III.

Australia-focused private equity has also seen a strong year of fundraising. Aggregate capital raised by private equity and venture capital climbed to A$5.4 billion ($3.9 billion; €3.4 billion) in 2018 at the end of September – the highest amount raised since 2008 – compared with A$2.7 billion in calendar year 2017, according to Australia Private Equity and Venture Capital Association 2018 Yearbook Report. BGH Capital raised its debut Australia and New Zealand-focused fund in May this year at A$2.6 billion, while Crescent Capital Partners raised A$800 million for its sixth fund in August after less than four months in market.

For China-focused fundraising, Mingchen Xia, managing director of the fund investment team in Asia at Hamilton Lane, noted that deleveraging in China has reduced liquidity in the domestic market, making fundraising for yuan-denominated funds more challenging. However, US-denominated fundraising remains active, as this capital is sourced largely from overseas LPs.

Investors’ FOMO-ing has driven mega fundraising

Private equity’s performance against other asset classes has continued to draw limited partners’ capital in record numbers and remains attractive to global pensions and sovereign wealth funds. But investors’ “fear of missing out” has also greatly influenced the market. Graham McDonald, global head of private equity at Aberdeen Standard Investments, noted  the $93 billion SoftBank Vision Fund is a response to investor demand. “Sometimes there is a fear in the investor community of missing out. And this is alive and well in certain aspects of that… As investors we have to be alert to that or we get left behind.”

Similarly California State Teachers’ Retirement System’s chief investment officer Christopher Ailman told PEI in May that these disruptors in private equity will have a huge impact and change the way the industry operates. “The huge size of these funds lends themselves more to buying and holding a company, and less to the speed of turnover. The sheer size, the sheer bite-size to come in and actually move the needle for these funds is going to be a very interesting challenge. It really actually makes them very much equal competitors with corporate M&A.”

More private capital than China state-owned backed deals

The year also saw a big change in where China deals are sourced. Judith Lee, managing director and head of investment banking at RBC Capital Markets, said only around 20 percent of capital for M&A came from China state-owned enterprises, while the rest came mainly from the private sector, which includes private equity shops. “In 2012, right before president Xi Jinping’s anti-corruption campaign, a majority of SOE money was being put into play. This change reflects the more challenging environment in a state-owned Chinese outbound investment and the increased scrutiny of Chinese money in countries like the US,” she said.

There was also a levelling off of China (including Hong Kong) outbound deal volume this year in infrastructure, transportation, industrial, technology, and consumer retail sectors, partly as a result of rising protectionist trade policies across Western governments.

Lee said the firm’s clients are reluctant to invest time and resources looking at US deals that may not get approval from the Committee on Foreign Investment in the US. “While previously it was just the sensitive sectors, right now that reticence is felt more broadly across sectors such as consumer/retail,” she noted. “In particular, Chinese investors particular are not keen to look into US transactions unless they are open and receptive to minority deals in less sensitive sectors.”

China outbound saw a sharp drop in the first half of 2018, according to Bain & Company’s second China outbound M&A report, More Rigor Means Better Results in China’s Global Pursuit. Outbound M&A deal activity represented more than 40 percent of deals in Asia-Pacific from 2015-2017, but saw this share drop dramatically in the first half of 2018.