A slow year ahead for APAC PE dealmaking – Bain & Co

A slowdown in Asia-Pacific private equity last year looks set to continue into 2023, according to a new report.

Economic turbulence and geopolitical tensions saw the region’s deal value drop 44 percent to $198 billion in 2022, according to Bain & Co’s Asia-Pacific Private Equity Report 2023. Exit value also fell by a third to $132 billion.

Total capital raised by Asia-Pacific-focused funds fell 43 percent to $105 billion, with funds also taking longer to close, the report said. According to PEI data, Baring Asia Private Equity Fund VIII was the region’s largest fund last year at $11.2 billion, followed by FountainVest Capital Partners Fund IV at $2.9 billion and Qiming Venture Partners USD Fund VIII at $2.5 billion.

Here are some other key findings from the year that was, and predictions for the year ahead.

China takes a plunge

Despite stepping away from its zero-covid policy, Chinese private equity is still stifled by geopolitical tensions. APAC’s largest private equity market saw the biggest decline in deal activity of any country in the region, dropping 53 percent to a nine-year low. China-focused funds raised a total of $25 billion last year, 77 percent short of 2021 levels.

“I think especially in China, the more China-focused funds will probably face more challenges when it comes to fundraising,” Elsa Sit, vice-president at Bain Private Equity practice, told Private Equity International.

China’s post-pandemic recovery is expected to be slow. Perhaps as a result, 50 percent of GP respondents expect the negative dealmaking trend to continue into 2024. However, it is also important to note that the research was conducted in November last year when China was still isolated under pandemic restrictions.

Geographic reshuffle

Investors’ shrinking appetite for China means other countries can potentially take a bigger slice of the pie. As China’s deal value share in the region plummeted to 31 percent, India’s share grew to 23 percent.

Instead of focusing on China, LPs are hedging their exposure to the region through pan-Asia funds. “We’ve seen growing pressure on the single country funds, especially the more China focused funds,” Sit said. “LPs are showing a bigger appetite towards the more reputable regional or global funds, in order to better manage risk given all the uncertainties we’re facing.”

Southeast Asian dealmaking did not appear to greatly benefit from the shift away from China. Though the region has been seen in some quarters as a potential alternative to China, investors have shied away from what are perceived as riskier bets due to the region’s venture and tech-heavy nature.

Buyouts remain popular in Australia-New Zealand and Japan, making up 70 percent and 76 percent, respectively, of the wider buyout deal value. Catalysed by depreciating currency last year, carve-outs were the most prevalent in Japan and South Korea.

Taking a back seat

A challenging fundraising environment also appears to have sparked a modest shake out of private equity players. The number of active investors in the region fell 2 percent, marking the first drop since 2015. Sit said that the market is “still pretty crowded”, with more than 3,200 active firms in 2022, compared with just 2,358 in 2020.

Private equity dry powder rose to a record high of $676 billion in 2022, with capital from venture funds and fund of funds as major contributors. GPs have also become more cautious with deploying capital in this uncertain environment.

It wasn’t all bad news. Asia-Pacific PE returns reached a new high of 15 percent in 2022, up from 13.5 percent a year earlier. Sit said: “Basically, under this kind of situation, you really have to pick the right market and the right sector.”