SINGAPORE (Mar 15): The private equity (PE) industry in Asia Pacific (APAC) reached new highs in 2018, after a record-breaking 2017, according to the annual <i>Asia Pacific Private Equity Report</i> by Bain & Company.

Now, the region represents 26% of the global PE market, a 9% increase from a decade ago, with $833 billion in total assets under management.

Deal value across the region peaked $165 billion in 2018, above the previous record high of $159 billion last year, and 48% higher than five years ago.

China and India dominated deal-making last year, making up almost 75% of total deal value.

Furthermore, exit values were also at record high, reaching $142 billion in 2018, up 39% over the past five-year average. But the total number of exits saw a sharp fall to 402, down 32% from the past five-year average.

Large exits dominated -- exits of $1 billion or more -- were almost 60% of total exit value, and the average exit value doubled to $353 million compared with the average for the previous five years.

However, overall Asia-Pacific focused fund raising was sharply lower in 2018, following a record high in 2017, dropping by more than 50% to $75 billion. This was mainly due to China’s move to enforce more stringent policies on wealth management products to improve transparency and reduce financial risk, as well as a record level of dry powder after raising ever-larger funds in recent years.

Despite the powerful momentum, uncertainty within the region continue to loom, due to the underlying macro-economic environment, rising interest rates, and the growing polarity between large funds with strong track records, and smaller, less experienced funds.

Bain & Company said that the record-breaking deal and exit values may be coming to an end, at least for some investors. The increasing market bifurcation and gathering macroeconomic headwinds predicted in the past are starting to materialise, potentially slowing the revenue growth and multiple expansions that have historically propelled Asia-Pacific PE returns. This means that vulnerable and less differentiated funds could disproportionately bear the brunt of a downturn.

The report has also identified three disconcerting market developments that could affect investment activity and returns for this year.

First, US-China trade tensions have increased the macroeconomic disruption in China and across the region.

Second, deal prices have remained high, but interest rates are steadily increasing after a period of decline. This will increase funding costs and could pause future multiple expansion.

Third, the region’s private equity market has become sharply polarised between large funds with strong track records that dominate activity across the region, and smaller, less experienced funds that are having difficulty raising funds and exiting.

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