HONG KONG/ SINGAPORE – March 28, 2023 – Private equity (PE) deal value in Asia Pacific plunged 44% year-on-year to $198 billion in 2022, ending two years of record dealmaking, according to Bain & Company’s Asia Pacific Private Equity Report 2023 launched today.

Slower economic growth, declining consumer confidence, falling manufacturing output, high inflation, and mounting global and regional uncertainties resulted in a perfect storm which dampened investor sentiment.

Across the region, deal value declined between 25% and 53%. Greater China and Southeast Asia saw the greatest fall at 53% and 52%, respectively, with the former challenged by uncertainties relating to the zero-Covid policy, geopolitical tensions and tech regulatory crackdowns, and the latter faced with fewer growth deals. Deal value in Australia-New Zealand (ANZ), Korea and Japan dropped 48%, 39% and 28%, respectively. Deal value in India declined 25%.

“The declines in deal value, exits and fundraising in 2022 should not be a surprise. In fact, conditions were set for a perfect storm. Investor exuberance and a superabundance of global capital helped propel Asia Pacific deal value to an extraordinary high in 2021. As economic forces battered the market in 2022, investors retreated and deal value fell back to the level of 2020,” said Kiki Yang, co-head of Bain & Company’s Asia Pacific PE practice, who is based in Hong Kong.

Greater China continues to hold the lion’s share of the region’s total deal value although it plummeted to 31%, a 9-year low. India and ANZ increased their shares to 23% and 19%, respectively.

When it comes to deal type, growth deals continued to outpace buyouts in 2022, producing 54% of deal value, up from 50% in 2021. However, the total value of large growth deals above $200 million fell 45% in 2022 compared with the previous year. Investors’ shrinking appetite for risk and the dramatic drop in the value of technology companies on stock markets contributed to this trend.

Growth deals dominate most of Asia Pacific’s markets except for ANZ and Japan, where investors favor buyout deals. Carve-outs were again an important buyout theme in 2022, especially in Japan and Korea where a challenging economic environment prompted conglomerates to focus on their core businesses and sell non-core operations.

“In all markets where buyouts dominate, the rising cost of deal financing was a key factor depressing the number of buyouts as central banks tightened credit, interest rates rose, and liquidity shrank,” said Tom Kidd, Bain & Company partner and co-author of the report, based in Singapore.

An uncertain business outlook and lower ratings for public companies helped push valuations down to 12x from 13.1x (median EV/EBITDA) a year earlier. Similarly, tough market conditions pushed some investors to the sidelines in 2022. The number of active investors in Asia Pacific fell 2% year-on-year, the first drop since 2015. The region’s top 20 funds accounted for close to a third of total deal value.

Following a record year for exits in 2021, exit value fell 33% year-on-year to $132 billion. Three key factors deterred general partners (GPs) from selling: a significant re-rating of public market valuations, fewer avenues for exits given the decline in IPOs, and deteriorating portfolio performance.

In a similar fashion, fundraising in Asia Pacific declined 43% to $105 billion in 2022, 70% below its 2016 peak. The share of Asia Pacific-focused funds dropped to 10% of global PE closed funds in 2022 compared with 16% a year earlier. On average, GPs needed more time to close new funds.

Sector view: Internet and tech continues to dominate; shift towards recession-resistant and ESG-focused sectors

The internet and tech sector continue to hold the largest share of private equity capital in the Asia Pacific region, however, its share of deal value dipped to 33% in 2022, down from 41% in the previous year. The decline was primarily due to fewer and smaller deals in China and India.

Advanced manufacturing and energy and resources sectors, on the other hand, recorded an increase in the number of deals in 2022, a reflection of investors’ preference for companies with a low-risk profile that generate steady cash flow. At the same time, government demand for private capital investment to develop and upgrade critical infrastructure including utilities, telecoms and transportation remains strong, especially in Southeast Asia and India. Investments in utilities and renewables made up 60% of deal value in the energy and resources sector, reflecting the rise of environmental, social and governance (ESG) considerations as an investment priority.

“Half of the GPs we surveyed plan to significantly increase their effort and focus on ESG in the next three to five years, up from 30% three years ago,” said Kidd.

Record dry power and solid returns show robustness of industry

Dry powder, or total unspent PE capital, rose to a new high of $676 billion, a 20% increase over the previous year. The buildup of dry powder was most pronounced in funds focused on venture deals and fund of funds. The share of unspent PE capital in venture funds and fund of funds increased to 30% and 31% of Asia Pacific dry powder, respectively, in 2022.

Despite the sharp drop in dealmaking, exits and fundraising, Asia Pacific PE returns rose to a new high of 15.0% median net IRR, from 13.9% a year earlier. Top-quartile funds continued to deliver robust returns well above expectations, at 25% median net IRR.

“Looking ahead, nearly one in four GPs we surveyed said cost improvement is the most important contributor to strong returns, up from only 5% five years ago. Higher inflation and weaker growth are likely to have a strong impact on portfolio performances in the coming year. GPs are clearly taking a more active role in portfolio management,” said Elsa Sit, practice vice president of Bain & Company’s Asia Pacific PE practice, who is based in Hong Kong.

Although macroeconomic conditions remain uncertain, Bain’s analysis show that even in a downturn, companies can accelerate growth and generate superior returns. The best PE funds follow a few key strategies in tough times.

The first is identifying recession-proof sectors and the top-performing companies within those sectors. Next, these funds use scenario planning as a vital tool to understand the range of potential outcomes for targets and portfolio companies. Finally, fund managers roll up their sleeves and help improve portfolio performance.

Editor's Note: For more information or interview requests please contact: Ann Lee, Bain & Company, tel. +65 6228 2960, email: ann.lee@bain.com