Australia
China
India
Indonesia
Japan
Malaysia
Philippines
Singapore
South Korea
Taiwan
Thailand
Vietnam
Germany
Hong Kong
USA
Switzerland
Singapore
United Kingdom
Over the past few decades, the private equity industry has flourished and transformed into a highly lucrative avenue due to the availability of promising assets at reasonable prices and investors willing to invest. However, as macroeconomic issues emerged and countries grappled with geopolitical concerns, things began to change.
According to S&P Global, private equity and venture capital investment in the Asia-Pacific in the Asia-Pacific region, excluding Japan, slumped in the first quarter of 2023 due to an unstable macroeconomic environment. The aggregate transaction value in the first quarter declined 45% year-on-year to $8.09 bn, whereas the number of deals dropped to 43 from 62 transactions in the previous year’s quarter.
Another data by Preqin states that during the first half of 2023, funds raised in the region accounted for 22% of that of 2022. At the same time, aggregate capital targeted by China-focused funds fell to $115.9 bn at the end of the second quarter, from $141.9 bn in the previous three months.
Reasons for the decline of private equity in Asia
Some of the major reasons behind this slump are slower economic growth, lack of consumer confidence, low manufacturing output, high inflation, and constant geopolitical tensions. Dealogic data shows that these factors deterred slightly conservative investors from participating in 2022. It also pointed out that active investors shrunk by 2%, the first decline since 2015, and the general partners needed more time to close new funds. However, Dealogic stated that the global and regional flagship funds with robust strong track records and local operations were least impacted.
Weakness in China is also one of the primary reasons for the slowdown in the private equity sector in Asia. Greater China saw a 53% year-on-year decline in deal activity. Geopolitical tensions between China and the US prompted the US to impose additional trade restrictions on selected sectors and aggravated the problem.
According to Choe Tse Wei, managing director of strategic advisory at Singapore’s DBS Group, the geopolitical tensions had led to shifts from China to other toward Southeast Asia and other emerging markets.
“Investor exuberance and a superabundance of global capital helped propel Asia-Pacific deal value saw an extraordinary high in 2021. That set the stage in 2022 for an equally sharp decline as economic forces battered the market, pushing deal value to the level of 2020,” according to Bain’s “Asia-Pacific Private Equity Report 2023.”
Besides the ongoing macroeconomic gloom, the stringent credit policy of the governments, the rise in public debt, and depreciating currencies pose a threat to financial stability.
The dismal state of private equity in Asia also reflects the broader impact of aggressive monetary tightening by major central banks which has raised borrowing costs and intensified concerns over debt defaults and a global recession. Higher borrowing costs have discouraged further deal-making, and private equity investors are also steering away from businesses with unpredictable cash flows. Sanctions on Russian exports due to its conflict with Ukraine have disrupted the global supply chains. This has especially impacted energy and pushed commodity prices higher, resulting in global inflation.
Japan stands as the only exception
The only exception to the declining private equity situation in Asia is Japan. The country was an outperformer and reflected the strength of its stock market. As per Preqin, private equity deal-making in Japan performed best in the region for two consecutive quarters. The weakness of the yen also boosted Japan’s appeal to global investors, especially in real estate.
Future of private equity in Asia
In the near future, things are looking bleak. As per Preqin, private capital fundraising in Asia Pacific could hit a decade low in 2023, primarily as investors shift focus from China-based funds. However, all hope is not lost for China. “Nonetheless, we continue to view China’s economy as holding the key to a full recovery in the region, with its broad range of investment opportunities and deep capital markets, and significant influence as the top trading partner for many APAC countries,” the Preqin report said.
Elsewhere, investment bankers indicated that deal momentum in Southeast Asia has begun picking up after some of the local sectors are undergoing consolidation. “Southeast Asia activity is still being driven by domestic consolidation in sectors such as financial institutions and TMT (technology, media, telecoms),” said Rohit Chatterji, co-head of M&A, Asia Pacific, at JPMorgan. Preqin highlights a silver lining and states that despite fundraising challenges, there is a deployable capital worth $417 bn in June, which was the highest ever.
