As Asia’s private equity braved yet another year of headwinds, the dynamics in the industry shifted considerably. From the emergence of new strategies to capital flow seeking new alpha, the diversity of Asia and an underpenetrated private capital market make it an exciting region to invest in.
The number of final fund closes in Asia Pacific in the first nine months of 2024 could be the lowest since Preqin started tracking it in 2001, per a recent report by the private markets data firm.
However, the $720-billion capital that general partners (GPs) in the region currently manage makes up only 11% of global assets under management. That leaves a lot of space for expansion, which will be driven by deeper penetration into various strategies and geographies.
Preqin also expects Asia’s private equity performance to witness a significant recovery after several years of contraction.
“If the macro dynamics remain stable into 2025 despite the year of change we saw in 2024, and inflation remains low enough for interest rates to remain steady or continue to fall, this may be the best time we have seen since 2021 to generate DPI through exits,” said Robert Elliot, Corporate M&A Partner at Linklaters.
In the coming year, investors are expected to build on several strategies and trends that took shape in Asia in 2024.
GP-led secondaries still hot
Asian managers were prompted to explore creative structures in order to generate liquidity for their investors as traditional exit routes dried up.
“M&A activity in many parts of Asia has been more patchy than at any time in the last 10 years,” Elliot commented on the lack of liquidity events in the region.
Both LPs and GPs turned to continuation funds as an exit tool while simultaneously buying time to maximise value for GPs’ portfolios. In the case of LPs, several of them saw secondaries as a core pillar of their alternative portfolio, per Coller Capital’s LP survey released earlier this month.
Meanwhile, GPs in Asia also showed an inclination to execute more complex deals, according to Dominic Goh, Singapore-based Managing Director of global private markets firm Harbourvest.
However, this GP-led secondary transaction is no money for old rope, given the unique set of risks and issues specific to APAC. “You need investment teams and investment committees that understand these challenges and can price and manage them effectively if they want to execute deals in the region,” Goh said.
There is also scepticism that continuation funds carry exposure to underperforming assets alongside better ones, which impedes valuation and risk management for LPs. Particularly in Asia, the region presents “a particular divergence in performance” between certain geographies and sectors, and the gap in pricing expectations still persists, Elliot said.
For a GP-led deal to work, Elliot opined, GPs will have to work harder with a tailored approach, finding separate types of investors that match assets in different geographies or sectors.
Private credit continues to shine
A stagnant private equity market, slowed down by a sombre exit market, has drummed up investor interest in another asset class: private credit.
Soo Cheon Lee, co-founder of private credit firm SC Lowy, said Asian financial institutions have shifted back to investment-grade lending, similar to the situation in the US market after the global financial crisis.
The heterogeneity of Asia – even though it is difficult to navigate – brings a huge value to entry, according to Lee, if GPs understand the difference and are capable of adjusting risks and returns.
According to Coller Capital’s survey, private credit currently captures the greatest deal of investor interest, with 37% of LPs planning to increase their allocations to this asset class.
Even as LP investments in Asia make up a very small faction of the capital they have invested in the US, more investors are diversifying into the continent, and their Asia exposure will “only get bigger and bigger”, Lee said.
“About 70-80% of the LPs are from the US. You have to educate them about the Asia market. The growth potential of Asia is great. The macro economy is pretty good. China was struggling but is now stabilising, India is a huge market, and the rest of the Asia is very stable,” Lee exclaimed.
New universe of wealth
There has been a rapid surge in private wealth in APAC in recent years, and the number of rich individuals is expected to grow even more, by over 38% between 2023 and 2028, per a Knight Frank research.
Alternative investment players are not going to miss this fortune. Large global firms like Blackstone, Apollo, EQT, Hamilton Lane, Partners Group and KKR have already tapped Asia’s wealth or plan to bring their semi-liquid products to this region.
“Asia is just a super-interesting market,” said Peter Beske Nielsen, Partner at EQT, who claimed to have “massive ambitions” for the region.
The average allocation into alternatives by the ultra-high-net-worth segment globally stands at 3-5%, compared to 20-25% for institutional investors, according to Nielsen.
Meanwhile, the number of opportunities for wealthy individuals, who have historically weighed a lot on public stocks, is declining as more listed companies are taken private and fewer private companies can go public.
“The universe of private companies has just expanded dramatically,” added Sueann Yeo, Head of APAC Private Wealth.
In Asia, EQT is looking to expand its private wealth business in Japan, Australia, New Zealand, China and certain markets in Southeast Asia like Thailand, Malaysia, and Indonesia.
However, there is still a big gap in terms of market education for both clients and financial advisors.
Investors remain bullish. Nielsen bets on a steep increase in private wealth within the next five to 10 years. “If you go from 3-5% allocation to 15% or maybe 20%, that is a lot of money in motion,” he said.
David Bajada, Schroders Capital’s Investment Director, Private Equity, affirmed: “There is no doubt that investors in Asia Pacific believe that private assets will play a very significant role in their portfolios going forward. A majority of wealth managers and financial advisers in Asia Pacific (71%) are already personally involved or will be involved in the private market allocation or product selection process.”
All eyes on Tokyo
KKR implemented its second tender offer for Fuji Soft last month. ABC Impact and HSBC Asset Management also invested in Tekoma Energy in the same period. That is just to name a few private equity activities in Japan recently.
With a low interest rate environment that is an outlier in the global context, a weak currency, corporate reforms, and a more receptive mindset to private equity, Japan has become the apple of investors’ eyes.
KKR co-CEO Joseph Bae reportedly said at the Hong Kong’s third annual Global Financial Leaders’ Investment Summit in November that Japan, its second-largest market, produced the best private equity returns.
It looks like a good time for GPs to be in Japan. Carlyle’s $2.8-billion fifth Japan fund closed in May is by far the biggest buyout vehicle in this market. Bain Capital, which has invested in excess of $5 billion in Japan, told Nikkei Asia that the firm is looking to double the quantum of capital over the next five years.
Meanwhile, Reuters reported recently that Hillhouse Investment has appointed former Bain Capital dealmaker to spearhead its expansion in Japan.
“Today’s private equity market in Japan continues to be the most exciting environment we have seen in our careers, and we are at the beginning of a further step-function increase in activity,” Carlyle co-heads of Japan Kazuhiro Yamada and Takaomi Tomioka wrote in a note.
Tetsuro Onitsuka, Tokyo-based Partner at EQT, opined that even as Japan had private equity upcycles before, the current heightened interest in the market looked “more sustainable”.
“Bigger deals are being done, the regulatory environment has tilted towards shareholders, many companies need investment, and there is a greater understanding of how private equity works and the advantages of engaging with it,” he said.
Watch out for more consolidation
While the consolidation among private equity players is happening more at a global level, it is coming to Asia, investors in the region have observed.
“In Asia, it is no longer unusual for larger players to have multiple strategies across private equity, real estate, infrastructure, and credit – or a combination of those”, which provides a catalyst for further mergers, said Linklaters’ Elliot.
BlackRock completed its acquisition of Global Infrastructure Partners earlier this year, while General Atlantic acquired sustainable infrastructure firm Actis in November, which have a significant exposure to APAC.
Earlier Asian targets were BPEA (now part of EQT) and Crescent Point (currently the Asian private equity arm of Ares Management).
Firms are incentivised to explore such combinations as they provide them with a different skillset or network of opportunities and also a different investor pool to facilitate future fundraising.
“The key remains in finding the most effective route to connect underlying deal generation and execution capabilities of the fund manager with the capital that has an appetite for exposure to those types of deal – sometimes a combination of firms is the fastest way to make that connection,” said Elliot.
The consolidation trend is expected to drive the industry closer to the new reality where large, diversified firms sideline smaller managers in the fundraising race. While large-cap GPs such as EQT can raise the hard cap for its next Asia fund, a lot of small managers in Asia have faced fundraising extensions or missed their fundraising targets.
