SINGAPORE - While Asia-Pacific private equity deal value and exit value in 2018 reached record levels since 2013, the outstanding performance masked worrying signs that point to turbulent times ahead for the market, according to a report by Bain & Company.
The region now represents 26 per cent of the global private equity market - up from nine per cent a decade ago - with US$883 billion (S$1.2 billion) in assets under management. But uncertainty lingers, driven by a weakening macro-economic environment, rising interest rates and the growing divide between large funds with strong track records and smaller, less experienced funds.
Deal value in the Asia-Pacific was US$165 billion in 2018, rising from US$159 billion a year ago. China and India dominated deal-making, taking up about 75 per cent of total value.
Exits are central to the private equity investing process as firms offload their investment after making a substantial return. Last year, exit value hit US$142 billion, up 39 per cent over the past five-year average. But the total number of private equity exits from investments declined sharply to 402, falling 32 per cent from the past five-year average. Large exits dominated, with exits of US$1 billion or more making up almost 60 per cent of total exit value, and the average exit value doubling to US$353 million compared with the average for the previous five years.
Driven by China's move to enforce stringent policies on wealth management products, as well as a record level of dry powder, overall Asia-Pacific focused fund raising plunged more than 50 per cent to US$75 billion from 2017.
"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. But we're seeing warning signs that suggest the party may be coming to an end, at least for some investors," said Usman Akhtar, a partner at Bain.
"The increasing market bifurcation and gathering macroeconomic headwinds that we've hinted at in the past are starting to materialize, potentially slowing the revenue growth and multiple expansions that have historically propelled Asia-Pacific PE returns. This means that vulnerable and less differentiated funds could disproportionately bear the brunt of a downturn."
The good news is, interest in South-east Asia from both general partners and limited partners is increasing despite a GDP slowdown. The region recorded a bump in deal value, up 38 per cent over the five-year average to US$13 billion while deal count increased to 76, up 18 per cent over the five-year average.
But exit value dropped 48 per cent from the five-year average to US$5 billion, as did exit count, dipping 52 per cent to 16.
With the risk of a global recession and other macroeconomic challenges, Bain expects the market for exits in Asia-Pacific to only get tougher, said Mr Akhtar.
That said, the firm has identified three factors that investors should keep in view in order to increase their edge over their competitors: sharpening their focus on China's tech and internet sector to maintain strong returns in a highly dynamic market, using advanced analytics to gain sharper insights during due diligence and assessment of threats and opportunities to portfolio companies, and investing with an eye to environmental, social and governance (ESG) issues.
A decade of impact investments has disproven the myth that ESG investments compromise returns, said Bain. On the burgeoning tech sector in China, it reminded funds that they need to understand just how different the rules of the game are in China, the number of failures that litter the landscape, and the risk of betting on a speculative investment bubble that could burst.