Three takeaways from Bain’s latest Asia-Pacific PE report

Subdued distributions, an aversion to tech and declining valuations were among the key trends shaping private equity in the region last year.

Headline risks dominated much of the discourse in Asia-Pacific last year and private equity did not escape unscathed, as Bain & Co has found in its latest regional report.

Here are three key takeaways from Asia-Pacific Private Equity Report 2020, published Wednesday.

APAC’s slowdown is hitting LP pockets

Private equity spending fell 16 percent to $150 billion last year, driven by a 38 percent decline in Greater China and 20 percent drop in Australia. Exits fell 43 percent to $85 billion – down 31 percent from the previous five-year average – and exit count plummeted to 330, a 10-year low.

Roughly half of the funds Bain & Co surveyed said the exit environment was more challenging in 2019 than in 2018. Contributing factors included a poorly performing initial public offering market and soft macroeconomic conditions. A record total in 2018 also meant portfolios were younger the following year, enabling GPs to hold off on selling.

Subdued exit activity hit distributions to investors. LP cashflows dipped into the red in Q4 2018 for the first time since 2013 and was negative again in the first half of 2019. Whether exits pick up again in 2020 remains to be seen, with coronavirus already interrupting deal activity.

“We’re telling any business with China exposure to prepare now but not to kick off marketing processes until the coronavirus situation has calmed down,” Jeff Acton, Tokyo co-head at Asia-focused investment banking advisory BDA Partners, told Private Equity International.

The future does, however, look bright: unrealised value reached a high of $806 billion in June, up 32 percent from one year earlier.

Tech may be losing its sheen

Spending on internet and technology investments dropped for the first time since 2016. The sector accounted for 42 percent of deal value last year, versus 53 percent in 2018, and the number of deals valued at $1 billion or above halved.

A decline in yuan-based fundraising in China contributed to the slump, with macroeconomic uncertainty and soaring valuations also adding to the decline. Next generation assets, including cross-sector businesses such as health-tech, commanded a 26x enterprise value-to-EBITDA entry multiple between 2017-19, compared with just 13x for unrelated sectors.

India defied the trend, with internet and tech spending up 90 percent from 2018 and 139 percent from the 2014-18 average thanks to a burgeoning venture capital scene.

“In the tech space, you can grow companies very quickly, so you might be able to justify above-average valuations even if they seem very rich at the time,” Niklas Amundsson, a Hong Kong-based partner at global placement agent Monument Group, told PEI in October.

Consumer products and healthcare were also net beneficiaries across Asia-Pacific, climbing 170 percent and 66 percent from their prior five-year averages respectively.

The price is (increasingly) right

Since 2016, more than 40 percent of Asia-Pacific deals commanded an entry multiple higher than 15x, compared with 25 percent to 30 percent from 2010 to 2015. High pricing remains a concern, with 65 percent of regional GPs surveyed citing this as their top concern last year.

Valuations are on the decline: entry multiples fell to 12.9x last year, down from 13.3x in 2018 and a record 13.4x in 2017. The proportion of deals costing 7x or less more than doubled last year, as did those between 9-11x. Around 60 percent of GPs surveyed expect pricing to decline further in the next two years.

The trend should have little bearing on performance, as only 10 percent of Asia-Pacific GPs said multiple expansion was their most important source of returns for exited deals last year, versus 15 percent in 2018 and 38 percent five years ago. Top-line growth was considered the most valuable lever of value creation, followed by cost cutting and mergers and acquisitions.