JAKARTA (TheInsiderStories) – Asia-Pacific private equity deal market had its best performance in 2017, driven by increasing investor confidence in their ability to generate a consistently high return in the region.

According to Bain & Company’s annual Asia Pacific Private Equity Report, deal value soared to US$159 billion last year, up 41 per cent over 2016 and 19 per cent higher than the previous all-time high of US$133 billion in 2015.

Particularly, Southeast Asia experienced an unexpected resurgence in private equity activity with two $5 billion deals that boosted deal value from $8 billion to $20 billion in 2017. Deal count also increased slightly from 65 to 70 last year as did exit count, up from 29 to 31.

A surge of megadeals ($1 billion or more) and pooled investments helped boost deal value with global general partners (GPs) taking a large share, especially at the top end in terms of deal size. The exit value of $115 billion marked the second-best year on record, only slightly below the 2014 peak; exit count hit a new high at 710. Fundraising rose 6 per cent to $66 billion, above the five-year historical average, boosted by the largest ever buyout fund raised in Asia-Pacific.

The value of buyouts jumped 94 per cent to $72 billion in 2017, making up 45 per cent of total Asia-Pacific deal value, compared with an average of 38 per cent from 2012-16. Moreover, the region’s share of global PE assets under management reached a new milestone of 23 per cent, up from 9 per cent a decade ago.

A combination of forces propelled the market to new heights, including an improved macroeconomic environment and mounting pressure to invest huge reserves of committed, unspent capital. As the volatility and tense political climate of the last two years eased, stock markets rallied, economic growth took off, and PE funds grew more comfortable putting capital to work.

“The Asia-Pacific private equity market showed signs of maturing and entering a new phase of growth powered by two key forces,” said Suvir Varma, head of Bain & Company’s Private Equity practice in Asia-Pacific.

“Investors grew more confident in the region as the macro climate improved and company owners increasingly accepted private equity funding. As a result, major players, including global and regional PE firms and institutional investors, stepped up their activity in Asia-Pacific last year, accelerating the flow of large deals.”

Underscoring broadening acceptance of PE, the value of the region’s private equity deals soared to an unprecedented 17 per cent of Asia-Pacific M&A transactions, while public-to-private deals more than doubled to a record $27 billion.

Despite large capital calls, limited partners (LPs) remained cash positive in Q3 2017 and for every dollar invested in 2014 to September 2017, they got $1.2 back on average. The Asia-Pacific region and the industry also continued to generate high returns. However, while Asia-Pacific will continue to offer ample opportunity to earn attractive profits, making money in an environment of high valuations have become more challenging.

Over the next five years, sources of value creation are expected to shift, pegged not just to market growth, but to organic company-specific growth performance. In Bain & Company’s 2018 survey of Asia-Pacific private equity executives, GPs said that while revenue growth is still the leading source of returns for exited deals, internal factors, such as cost and M&A choices, are gaining in importance.

Sourcing proprietary deals is also an increasing challenge for Asia-Pacific GPs: more than 70 per cent of survey respondents said competition had intensified moderately or significantly, and 63 per cent said regional/local PE firms were their biggest competitive threats with strategic/corporate players close behind at 47 per cent.

Steady economic growth may no longer propel multiples, and intense competition has forced prices up. According to the results of the Bain & Company survey, GPs said that the top two challenges keeping them awake at night are the lack of attractive deals and the valuations of potential targets being too high. Many believe the market has reached the top of the cycle and prices could decline in the years ahead.

Email: elisa.valenta@theinsiderstories.com