To call last year an eventful one for Asia-Pacific private equity markets would be an understatement, with record dealmaking and exits tempered by regulatory upheaval, geopolitical tensions and a top-heavy fundraising environment.
Bain & Co’s latest Asia-Pacific Private Equity Report, published on 30 March, sheds new light on how these factors played out across the asset class.
Here are five key takeaways from the report:
Deal value was up 82 percent from the previous five-year average in 2021. Greater China accounted for $128 billion of new deals, followed by India with $61 billion. South Korea’s deal value more than doubled to nearly $30 billion, driven by four megadeals; Japan and Southeast Asia also posted 150 percent and 143 percent increases respectively.
Exits more than doubled last year and were up 54 percent over the previous five-year average. The average exit size also rose 38 percent over that period. Half of the GPs that Bain & Co surveyed said the exit environment was less challenging than in 2020.
Chinese listings fell in the US
IPOs remained the most popular exit route in APAC last year, accounting for 47 percent of deals. Greater China generated 59 percent of these IPOs, with mainland China and Hong Kong the main IPO destinations for Chinese companies in the second half of the year.
US listings by Chinese companies plummeted in H2 2021 after the US raised disclosure requirements and China passed laws enhancing restrictions around the cross-border transfer of customer data. China’s exit value tumbled 50 percent in the second half from the same period a year earlier.
China’s regulatory crackdown and tensions with the US have contributed to a more challenging fundraising environment in the region – a dynamic that may well spill over into this year.
“If you look at especially the second half of 2021, and if you think about looking forward for 2022, there’s quite a bit of uncertainty in the market,” Kiki Yang, leader of Bain & Co’s Asia-Pacific PE practice, told Private Equity International. “When we think about the challenges to the market, historically [it] has always been that there’s a lot of dry powder, which is still true… but I think this time you also couple that with a lot of geopolitical uncertainties.”
Pricing is the top concern
Deal multiples rose for the second year in a row to 13.2x, driven by record dry powder, increasing appetite among global and pan-regional players, and increased competition for a smaller number of desirable assets, particularly in the aftermath of China’s regulatory crackdown.
Nearly three-quarters (72 percent) of GPs identified higher valuations as the industry’s top concern, up 9 percentage points from the prior year. More than a third (35 percent) expect them to increase in the next two years.
Nearly half (46 percent) of GPs identified global firms as their biggest threat. These players were the most active in Asia-Pacific last year, participating in 60 percent of transactions. Competition from institutional investors also rose, having participated in 36 percent of transactions last year, versus 26 percent in 2020.
Deals are getting crowded
The average number of buyers participating in Asia-Pacific growth equity deals continued their gradual climb last year, reaching on average 4.4 participants in each transaction, up from 3.8 in 2020 and 3.5 the prior year. Buyout deals featured 1.4 participants – a modest increase from 1.3 in 2020, but broadly in line with prior years.
Aside from providing GPs with more firepower for larger transactions, other advantages of a club deal include reducing the burden of writing a large equity cheque and diversifying investment portfolios. Bringing in sponsors with different expertise and a wider talent pool can also help the target company in its operations post-acquisition.
“Club deals are getting more and more popular,” Yang said. “I think some of this has to do with the fact that the deal [sizes] are increasing in certain parts of the market.”
Sustainable investing has accelerated
GPs’ focus on sustainable investing, already on the up in recent years, accelerated sharply in 2021. Some 57 percent of Asia-Pacific GPs said they plan to increase their ESG effort significantly in the next three to five years, compared with 41 percent in 2020 and 30 percent in 2019.
“If you think about the government policies, China decarbonisation is a huge agenda for the government,” Yang said. “I think just from a policy point of view, in many countries in Asia you have that as well.”
Hong Kong-based alternatives giant PAG is among those increasing its focus on ESG and sustainability. The firm’s recent IPO filing disclosed plans to launch dedicated ESG and impact-focused funds and investment products, with priorities including reducing energy consumption, increasing diversity and enhanced corporate social responsibility.