Asia-Pacific dealmaking fell 44 percent to $198 billion last year, according to Bain & Co’s Asia-Pacific Private Equity Report 2023published this week. Exit values declined by a third to $132 billion and total capital raised by APAC-focused funds dropped 43 percent to $105 billion.

China has been at the heart of APACs PE slowdown. A perfect storm of rising global tensions, a 2021 regulatory crackdown and pandemic-related disruption has weakened Western LP appetites for the region’s largest market. Greater China’s share of APAC fundraising shrank to 24 percent in 2022 – a 15-year low; its share of deal value fell to 31 percent – a nine-year low.

Though the picture may look rosier following China’s reopening at the turn of the year, 2023 is likely to remain a challenging environment for APAC PE. As Bain & Co noted, the uncertain macroeconomic outlook and intense competition for deals will continue to limit investments.

It’s important to note that not everyone is thinking differently about Chinese PE. Carlyle Group sees the market pullback as an opportunity to capture assets at more attractive valuations, the firm’s Asia chairman Xiang-Dong Yang told Private Equity International in September.

Still, diminished LP appetites for the region mean that – like many of their global peers at present – APAC funds are likely to remain in market for longer. Case in point: pan-Asian giant PAG, a firm with strong pedigree in China, took less than six months to raise $6.1 billion against a $6 billion target for its third flagship in 2018. By comparison, PAG Asia IV launched in October 2021 with a $9 billion target and had raised about $2.4 billion as of 21 March, 2023, according to SEC filings.

Ongoing headwinds have the potential to reshape APAC PE in the near and medium term. India, for example, has been a direct beneficiary of China’s slowdown. As China’s deal value share in the region plummeted last year, India’s grew to 23 percent. Firms such as Carlyle and KKR have been highly active there during the pandemic; LP giant Ontario Teachers’ Pension Plan launched a Mumbai office last year and Korea Investment Corporation is understood to be in early discussions about a new overseas office, with Mumbai among the locations being considered.

China’s PE market is also adapting. As PEI explored this week, a growing number of international players are launching yuan-denominated vehicles targeting Chinese investors or funds that use China’s Qualified Foreign Limited Partnership programme to convert foreign currency into renminbi. This comes amid an extremely tough fundraising environment for dollar-denominated China funds.

Of course, there are likely to be winners and losers as GPs and LPs alike rethink their approaches to the region. This shake-out appears to have already begun: the number of active investors in APAC fell 2 percent last year, marking the first drop since 2015, according to Bain & Co.

Make no mistake: APAC will remain a key part of any sophisticated investors’ portfolio moving forward – not least because, as Bain & Co noted, PE returns in the region reached a new high of 15 percent in 2022, up from 13.5 percent a year earlier. What does appear to be evolving over time, however, is how and where those returns are being sought.

– This article was updated to reflect that Mumbai is one of several locations being considered for KIC’s next overseas office.