More uncertainty for Asia-Pacific private equity after a turbulent year: Report

SINGAPORE - An unstable economic landscape amid higher inflation and weaker growth in 2023 will affect the performance of private equity firms in the Asia-Pacific region, said Bain & Company in a new report.

The grim outlook for private equity, which refers to capital investment made in companies that are not publicly traded, follows a turbulent 2022, when deal value across Asia-Pacific plummeted 44 per cent to US$198 billion (S$263 billion).

“Macroeconomic weakness is now the No. 1 concern keeping the region’s investors awake at night,” said Bain in its 2023 Asia-Pacific Private Equity report.

More than 50 per cent of private equity fund managers surveyed expect the negative trend to continue into 2024, added Bain, a global management consulting firm.

It said the beginning of an aggressive interest rate hiking cycle in 2022 by central banks, led by the United States Federal Reserve, flagged the end of cheap debt for buyout deals.

Recession fears spooked banks from providing leveraged loans, toppling year-end totals for deals, exits and fund raising.

Mr Hugh MacArthur, chairman of Bain’s global private equity practice, said: “This pause has continued into 2023 and will likely persist until macro factors stabilise.”

Mergers and acquisitions by private equity firms in the Asia-Pacific in the first two months of 2023 fell 28 per cent from the same year-ago period, according to data compiled by Bloomberg.

Mr MacArthur, however, added that the tough conditions in the market also mean that “opportunity awaits firms that stay aggressive and focus on creating value from the inside out”.

The deal-value decline in the region was led by a 53 per cent fall in the Greater China region, followed by South-east Asia’s 52 per cent drop.

Australia and New Zealand saw a 48 per cent decrease, while South Korea fell 39 per cent and Japan was down 28 per cent.

The nosedive in Asia-Pacific’s private equity market comes after a decade of strong growth and surprising resilience through the first two years of the Covid-19 pandemic.

Investors, sensing a new era of slower growth, persistent inflation and greater uncertainty, are taking time to recalibrate their strategies, recognising that what worked well in the past may not be the right approach for 2023 and beyond.

“If the conditions – macroeconomic uncertainty, poor company performance and a decline in deal activity – that prevailed in 2022 persist, valuations may continue to contract as fund managers adopt a wait-and-see attitude,” said Bain in the report.

The report pointed out that geopolitical factors – such as the war in Ukraine and US-China tensions – also contributed to the decline in private markets.

Greater China’s share of the region’s total deal value plummeted to 31 per cent, a nine-year low, while India increased its share to 23 per cent.

Sectorwise, for more than a decade, the Internet and technology sector has attracted the largest share of private equity capital in the Asia-Pacific. However, its share of deal value dipped in 2022 to 33 per cent from 41 per cent a year earlier.

The traditional strongholds for Internet and tech deals – Greater China, India and South-east Asia – all experienced sharp declines.

Greater China’s Internet and tech deal value fell 62 per cent year on year. India saw a 52 per cent decline, while in South-east Asia, deal value for the sector fell by 49 per cent.

Advanced manufacturing and energy and resources were the only sectors that had more deals in 2022.

That shift reflected investors’ preference for companies with a low-risk profile that generate steady cash flow, the report noted.

“At the same time, government demand for private capital investment to develop and upgrade critical infrastructure including utilities, telecommunications and transportation remains strong, especially in South-east Asia and India,” added Bain.

Meanwhile, a growing embrace of environmental, social and governance (ESG) considerations boosted interest in renewable energy companies.

Half of the general partner (GP) firms surveyed plan to significantly increase their effort and focus on ESG in the next three to five years, up from 30 per cent three years ago, the report found.

Despite the sharp drop in dealmaking, exits and fund raising, Bain said Asia-Pacific private equity returns rose to a new high of a 15 per cent median net internal rate of return in 2022, from 13.9 per cent in 2021.

But a turning point may lie ahead.

“More than one-quarter of Asia-Pacific GPs we surveyed expect their net returns to decline in the coming three to five years due to increasing competition, weakening portfolio performance, fewer exit options and declining multiples in an uncertain macro-environment,” said Bain.

Correction note: In an earlier version of this story, Bain & Company was incorrectly referred to as Bain Capital. It has been corrected. We are sorry for the error.