PE deals in APAC reach record levels in 2018 but fundraising drops

US dollars. Photographed by Colin Watts on Unsplash

Private equity deals in the Asia Pacific rose to $165 billion in 2018, a record for the region, but fundraising by general partners (GPs) slid over 50 per cent partly due to a dry powder pileup, according to a Bain & Co report.

PE fundraising in the region last year dropped to $75 billion, or 34 per cent below the previous five-year average. In fact, Asia Pacific’s share of the global fundraising declined significantly to 14 per cent last year from 20 per cent on average over the past five years, according to the Asia Pacific Private Equity Report 2019 released on Friday.

Large firms were able to raise capital and close new funds quickly as limited partners (LPs) increasingly refocused on GPs with scale and reputation, and made big bets. On average, experienced funds larger than $1 billion needed only seven months to close, and they were able to meet or exceed their targets.

“Fund-raising data underscored the shift toward a PE market where winners take all—or nearly all. The number of Asia-Pacific-focused funds that closed in 2018 plunged to 256, a 57 per cent drop from 593 in 2017.

But for funds that closed, the average size rose to a record $294 million, up 55 per cent from the 2013–17 average. And they were 10 per cent over target, compared with negative 1 per cent for the previous five years,” said the report.

Among firms that were able to raise large vehicles last year were Hong Kong-based PAG Asia Capital that raised a $6 billion fund, exceeding its $4.5-billion goal. Similarly, Bain Capital raised its $4.65 billion Asia IV fund in six months, exceeding its $3.5-billion target.

In contrast, smaller and newer funds had a much harder time raising capital. Funds that raised less than $1 billion required an average of 16 months to close, while first-time funds needed 27 months.

The tech, internet rush continues

Internet and technology investments continued to dominate the market, making up 50 per cent of deal count in 2018. Consumption-related sectors such as healthcare and services also represented a large proportion of total PE activity.

As the middle class in China and India continues to expand, businesses in these sectors are growing rapidly and seeking capital. With the risk of a recession looming, demand for technology, healthcare and consumer services—sectors that tend to thrive even in a downturn—may increase in the coming year, Bain said.

“Investors’ appetite for technology and Internet companies was undiminished, and deal size in these two sectors mushroomed… Looking forward, three important themes are playing an increasing role in the Asia-Pacific private equity market: the rush to invest in China tech and Internet companies; the use of advanced analytics as a tool to improve fund performance; and a shift toward environmental, social and governance (ESG) and impact investing,” said the report.

Moreover, many GPs have sharpened their focus on China’s burgeoning new economy sectors to help maintain strong returns in a highly dynamic market. Internet and technology sectors have accounted for almost 85 per cent of the growth in Greater China private equity since 2010.

“Alluring as that opportunity is, however, PE funds 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,” the report added.

APAC makes records, SEA grapples with weak exits

The value of Asia-Pacific private equity exits reached a record $142 billion in 2018, up 39 per cent over the past five-year average. That dynamic continued to power a virtuous industry life cycle by creating positive cash flow for LPs on average.

Led by China, India and South Korea, the surge in exit value far outpaced the previous all-time high of $125 billion in 2014. However, large deals were more prevalent, and the total number of exits declined sharply. Exits of $1 billion or more were 58 per cent of total exit value, and the average exit value doubled to $353 million from the 2013–17 average.

In contrast, exit values dipped sharply in Japan, Southeast Asia, and Australia and New Zealand compared with the past five-year average.

During 2018, trade deals were the largest exit channel. Walmart’s $16-billion purchase of India’s Flipkart from SoftBank Vision Fund and others helped push trade deals to 63 per cent of total deal value from 53 per cent a year earlier. Other large trade sales included the sale of China’s Ele.me for $5.2 billion.