Asia PE winners take (nearly) all – Bain report

A winner-take-all dynamic dominated Asia private equity in 2018, which could mean a significant number of funds face hard times this year, according to the latest report from Bain & Company.

Asia-Pacific private equity’s momentum may soon come to an end, leaving smaller and undifferentiated managers with a tough chance of surviving.

The region is now a market where winners take all – or nearly all – according to Bain & Company’s Asia-Pacific Private Equity Report 2019.

“Over the last several years, private equity in Asia-Pacific seemed to be unstoppable, and 2018 reinforced that trend in terms of record-breaking deal and exit values,” said Kiki Yang, who leads Bain & Company’s Asia-Pacific private equity practice, in a statement accompanying the report. “But we’re seeing warning signs that suggest the party may be coming to an end, at least for some investors.”

Yang added that increasing bifurcation and macroeconomic headwinds are also starting to materialise, potentially slowing the revenue growth and multiple expansions that have historically propelled returns in the region. “This means that vulnerable and less differentiated funds could disproportionately bear the brunt of a downturn.”

While the region saw all-time highs in deal and exit activity in 2018 – growing 48 percent and 39 percent respectively compared with the 2013-17 average – fundraising fell by more than 50 percent to $75 billion, according to the report.

Several trends are behind the decline, of which the most noteworthy is investors’ increasing flight to quality and the preference for larger funds with strong track records.

The number of Asia-Pacific-dedicated funds that closed in 2018 fell to 256, a more than 50 percent drop from 593 in 2017, the report noted. Meanwhile, for funds that closed, the average size rose to a record $294 million – up 55 percent from the past five-year average. What’s more, these funds exceeded their targets by 10 percent on average.

The largest funds that closed in 2018 include PAG, which amassed $6 billion for its third pan-Asia vehicle in November, raising $1.5 billion more than its original target. Fund III was 60 percent larger than its predecessor. The Carlyle Group raised $6.55 billion for its fifth Asia buyout fund in June, exceeding its $5 billion target. Fund V was 65 percent larger than Carlyle’s previous vehicle.

By contrast, smaller and newer funds had a much harder time raising capital. Funds that had a target of less than $1 billion took an average of 16 months to close, and new funds exceeded 27 months, according to the report.

This bifurcation of funds is also notable in China, the region’s largest private equity market. CITICPE closed its third China fund above its $2.2 billion hard-cap in July, backed by a more diversified LP base that includes non-Asian public and corporate pension funds, endowments and financial institutions. Meanwhile, Warburg Pincus is back in market with its second China-focused fund, which is seeking up to $4 billion.

Alice Huang, a partner with Morgan, Lewis and Bockius based in Hong Kong, told Private Equity International that, similar to the rest of the region, fundraising by emerging managers in greater China slowed in the second half of 2018 as the macro-economic climate became increasingly challenging.

“There is also more regulation on funds, and the cost of doing business for these managers has increased. In addition, they are dealing with competition from US and European firms who have raised their Asia-dedicated mega-funds.”

According to Bain, China has introduced stricter policies on wealth management products to improve transparency and reduce financial risk, as well as restrictions on banks and insurers’ investing in private equity, which has led to a 86 percent decline in yuan-denominated fundraising in 2018.

Huang, however, noted that GPs are positioning themselves for a potential market downturn by raising funds now and deploying later when assets are cheaper. “In anticipation of this, GPs are raising new funds even though they haven’t fully deployed the previous fund. GPs know fundraising takes time and they want to be in a position to move swiftly in acquiring companies when valuations come down.”

With $883 billion in total assets under management, Asia-Pacific now represents about a quarter of the global private market, up from 9 percent a decade ago. Overall, the region’s share of global fundraising declined significantly to 14 percent in 2018 from 20 percent on average over the past five years, according to Bain.