Asia Pacific Private Equity Deal Value Hit Record High Despite Global Covid-19 Disruption

Exits and fund-raising continued to decline; Bain & Company survey finds that despite Covid-19, high valuation continues to be biggest concern

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Bain & Company

Mar 25, 2021, 07:21 ET

HONG KONG, March 25, 2021 /PRNewswire/ -- Private equity (PE) investors in Asia Pacific braced for a difficult year in 2020 as two years of record investment in the region had ended in 2019 with a sharp decline in deal value, exits, and fund-raising. However, no one was prepared for Covid-19. Shocked by the fallout, investors recoiled at first but many quickly jumped back into the market, especially in China, India, and Japan, lifting deal value across the region to a record high of $185 billion, up 19% from 2019 and 23% over the previous five-year average.

The environment remains challenging: exits hovered close to a 10-year low and fundraising tumbled again. According to Bain's 2021 Asia-Pacific private equity survey, conducted with 162 senior market practitioners, the top concerns for General Partners (GPs) surveyed include high valuations, increased competition and the ongoing impact of Covid-19.

These are among the findings from Bain & Company's 2021 annual Asia-Pacific Private Equity Report, released today.

"It's been a rollercoaster year for private equity in Asia," said Kiki Yang, co-head of Bain & Company's APAC Private Equity practice. "But while dealmaking ended the year on a high, Covid-19 has not gone away, and building portfolio resilience will be a crucial skill for leading investors."

Dealmaking

Dealmaking was the bright spot in 2020, reaching a fresh peak of $185 billion. After a sudden halt in the first quarter, activity picked up especially in China and India. This robust dealmaking helped Asia-Pacific assets under management rise to 28% of the global PE market.

China's total deal value rose to $97 billion, up 42% from 2019 and 22% higher than the previous five-year average. Meanwhile, India continued to increase its share of deal activity in the region. Deal value rose to $38 billion, up 64% over the prior five-year period. The growth came partly from an extraordinary series of 10 private equity investments totaling almost $10 billion in technology multinational Jio Platforms, and seven investments in Reliance Retail.

While deal value grew in Japan and Australia–New Zealand from the previous five-year averages, South Korea's deal activity was on par with previous years. Travel restrictions affected deal activity significantly in Southeast Asia, where deal value declined 16% over the previous five-year average.

Throughout the region, investors are targeting fast-growing companies with digital business models and platforms that were boosted by the switch to virtual work, education, and retailing. These digitally accelerated sectors include e-commerce, e-learning, digital healthcare, online booking services, online entertainment, and digital payments and financial services.

Exits

Following a breathtaking fall to a 10-year low in 2019, the number of exits was flat last year. Exit deal value totaled $70 billion, down 24% year-on-year and 40% from the previous five-year average, as PE managers waited for better times to sell portfolio companies. Of the GPs we surveyed, more than 70% of GPs surveyed say the exit environment was more challenging than in 2019, pointing to Covid-19 as the principal cause for a weak exit environment.

One bright spot was the initial public offering (IPO) exit channel. IPOs dominated the exit market, making up more than 60% of exits by value, almost double the previous five-year average. China accounted for 86% of the region's IPOs and the majority were healthcare and technology companies.

The value of the companies held in PE portfolios, or unrealized value, continued to climb, reaching $1.04 trillion, up 33% year-on-year. GPs' inclination to wait for better exit conditions has created an exit overhang, which will increase pressure on fund managers to accelerate exits in coming years.

Fundraising

Fund-raising slowed in 2020, overshadowed by a poor exit environment. Funds focused on Asia-Pacific raised $90 billion, down 32% year-on-year, 53% from the prior five-year average, and 64% from the peak year of 2017. The number of funds that closed fell to 356, down 76% from the 2017 peak. By contrast, global PE fund-raising declined only 11%. Asia-Pacific's sharper decline pushed down the share of purely Asia-Pacific-focused funds as a percentage of the global total to 12%.

Despite the sharp drop in fund-raising, dry powder reached another new high as market uncertainty and high valuations kept some investors on the sidelines. Total unspent private equity capital at Asia-Pacific-focused funds rose 22% to a record $477 billion. This represents 3.2 years of future investment, up from 2.7 years in 2019.

Asia-Pacific fund-raising is likely to bounce back in 2021, as efforts delayed last year move ahead. However, the coming years may see a geographic shift in the LP base. More than 30% of GPs in the region expect such a change, according to our survey, including nearly half of China's GPs.

Returns

Returns remained strong, and private equity again outperformed the region's public markets by at least 3 percentage points across 5-, 10-, and 20-year horizons.

According to the survey, 60% of GPs surveyed say top-line growth will be the most important factor contributing to returns in the coming five years. Underscoring that conviction, 56% say they have a robust value-creation plan in place within the first six months of investment, including a short list of key initiatives for most of their portfolio companies. However, follow-through is the sticking point. Fewer than 30% say the majority of their management teams execute their value-creation plans successfully and deliver the intended results.

Nearly 20% of GPs say margin expansion or cost cutting would be the key factor in generating returns in the next five years, while 12% are counting on multiple expansion, down from 23% five years ago.

What's ahead for 2021?

Looking forward, there is light on the horizon. Though GPs are concerned about the ongoing effects of Covid-19, nearly 80% expect the macroeconomic climate to be more favorable this year, given the approval of promising vaccines last December.

Key trends in 2021 and beyond:

Digital business models will accelerate: Amid the many disruptions and challenges industries faced in 2020, growth powered ahead almost unperturbed in one sector: digital businesses. Our survey found that Asia-Pacific GPs are most interested in investments in digital health, e-commerce, and e-learning.
Resilience will be a trait of winning investors: Resilience is key to survive and recover from sudden shocks. Many GPs discovered in the midst of the pandemic that their portfolios weren't sufficiently resilient, more than 60% of Asia-Pacific GPs surveyed would be willing to invest at least 5% of short-term profits to improve resilience.

"Asia-Pacific has been an exciting and dynamic region for any global private equity fund, " said Andrea Campagnoli, a partner in Bain & Company's Private Equity practice based in Singapore. "Improving macroeconomic conditions coupled with many exciting investment opportunities, especially in digitally advanced sectors, will continue to draw strong interest from investors."

Editor's note: To receive a copy of the report or arrange an interview, contact Nicholas Worley at [email protected] or +852-2978-8830.

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