This article originally appeared in The Singapore Business Times.

It's hard not to conclude from the headline numbers that the market for private equity (PE) in South-east Asia was anything but a disappointment in 2012. After several years of high expectations for a burst of investment activity in the fast-growing region, deal value fell 16 per cent to US$4.9 billion and the number of deals dropped to just 32.

Little has changed to alter the region's upbeat growth story. Investor enthusiasm runs high, and funds are still under pressure to put unspent capital to work. Yet like much of the PE landscape globally, South-east Asia remains in a holding pattern as firms struggle with intense competition, shaky macroeconomic conditions and region-specific challenges.

Are predictions of a breakout misguided? We don't think so, based on our analysis of the market's core drivers and the results from a joint survey by Bain & Company and the Singapore Venture Capital & Private Equity Association (SVCA). Despite the decline in deal volume, there were several important developments in 2012 that should unlock more activity—including a strong increase in exit volume and moderation in return expectations among investors.

What's clear is that PE and venture capital (VC) investors are flocking to South-east Asia for very good reasons. Spanning 10 nations from Myanmar to Singapore, Asean boasts a fast-growing middle class, an abundance of resources and relatively stable, open economies that are hungry for new investment. With a combined nominal GDP of US$2.3 trillion, it is on track to rise from the world's eighth-largest economy to fourth over the next two decades.

Increasingly, the region's potential is drawing investors who see it as an attractive alternative to China and India. After raising substantial capital aimed at those two countries, general partners have failed recently to generate expected returns amid struggles to both close new deals and find exits there. Hoping to keep their allocations to Asia consistent, frustrated investors have shifted their interest southward. That has prompted PE firms to scour the South-east Asian economies for deals, with a special emphasis on Indonesia.

The result has been an explosion in competition, emboldening sellers to seek higher valuations. Buoyant equity markets in South-east Asian countries have led to soaring public asset prices. And the influx of PE firms looking for deals has collided with growing interest among cash-rich corporate buyers, creating inflated price multiples. Amid a growing mismatch in expectations between buyers and sellers—particularly in red-hot Indonesia—firms have held fire, concerned about meeting high-return targets.

The situation has put PE firms under increasing pressure to make something happen. Not only have they had trouble putting new money to work, but because of sluggish exit volume from 2009 through 2011, anxious limited partners have received minimal returns of capital until very recently. The average age of PE portfolios in South-east Asia has grown to 4.3 years in 2012 from 3.6 years in 2010, as deals over five years old have nearly tripled to almost 45 per cent of the total.

The good news is that improvement is already on the way. Exit volume escaped the doldrums in 2012, soaring to US$15.6 billion in 2012 from US$5.7 billion a year earlier.

The substantial return of capital is a strong indicator of a viable PE cycle in South-east Asia, which should ease anxiety.

Results from the 2013 survey also show that investors are slowly becoming more realistic about what they can expect from these markets. Five years ago, more than 70 per cent of investors were demanding returns of greater than 20 per cent, while this year two-thirds of the respondents were looking for something closer to 16 per cent. That remains a high expectation globally, but should make it easier for PE and VC investors to find viable deals.

Most important, interest in the region continues to build. Survey respondents predict increased deal activity, particularly in the consumer, healthcare and energy sectors. Nearly two-thirds said South-east Asia is becoming more important in their investment strategy and signalled that while Indonesia will likely continue to dominate interest, investment will broaden in Singapore, Malaysia, Thailand, the Philippines and Vietnam.

Exit activity, meanwhile, should stay on the upswing. Given the corporate interest in the region, we expect trade exits to continue as the most viable channel, with fund-to-fund exits likely to surge from a small base. The IPO market will undoubtedly remain volatile in the region, but three large offerings in Malaysia last year signalled significant improvement.

All of this suggests that it is only a matter of time before deal volume in South-east Asia accelerates. But that doesn't mean anything will come easily once it does. In this intensely competitive market, survey respondents said high seller expectations and the search for good companies will continue to test fund managers. The spoils in South-east Asia will not be divided evenly. The winners will be those who can raise their game by improving local insights, increasing proprietary deal flow, assembling the strongest management teams and building the best companies.

Suvir Varma is a partner at Bain & Company and leader of the firm's Private Equity practice for the Asia-Pacific region. Johanne Dessard and Ee-Ping Khoo are Bain & Company managers.