Bain sees mix of strength, vulnerability in Asia-Pacific private equity

Bain & Co. said strong results for Asia private equity in 2018 masked growing challenges for the industry over the coming year, according to the firm's annual report on private equity in the region.

The value of Asia-Pacific deals and exits, as well as the region's share of global private equity activity, all set new records last year.

Deal value reached $165 billion, up from the record $159 billion total set in 2017; the value of exits reached $142 billion, besting the $122 billion mark posted in 2014. Meanwhile, with $883 billion in total assets under management, the region accounted for 26% of the global private equity market, up from 23% the year before.

But mixed in with those healthy results were "warning signs that suggest the party may be coming to an end at least for some investors," said Kiki Yang, partner, who leads Bain's Asia-Pacific private equity practice, in a news release.

Fundraising for the year dropped more than 50% from the previous year's record high to $75 billion, a decline the report tied to moves by the Chinese authorities the previous year aimed at tighter regulation of the country's wealth management industry.

Meanwhile, the bifurcation trend of recent years, in which industry heavyweights have been able to garner billions of dollars for new funds while smaller competitors struggle, continued apace in 2018, even as rising interest rates threatened to slow the revenue growth and multiple expansions that have facilitated the industry's Asia-Pacific growth.

Indications that a bubble could be forming in the internet and technology sectors — a focus in recent years for private equity deals in key markets in the region such as China and India — are another near-term threat.

The latest report showed that new economy deals "tend to be overpriced," with Greater China median multiples of 31, compared with 17 for other Greater China sectors and 13 for all Asia-Pacific sectors, said Johanne Dessard, practice director in Bain's global private equity practice, in an interview.

The multiple on returns for capital invested in tech assets, meanwhile, dropped to 1.9 for the period between 2016 and 2018, from 4.7 for the prior two years between 2014 and 2015, a trend that leaves broader private equity returns under pressure, Ms. Dessard said.

That, in turn, could weigh on private equity returns for China, which "claimed more than 70% of the total value of Asia-Pacific internet and technology private equity deals in 2018," the report said.

"Over the past eight years, China's new economy accounted for 83% of the growth in investment in Greater China, making it the largest contributor by far to the growth of the Asia-Pacific region. Private equity investors poured $59 billion into China's internet," the report said.

The report called speculative investments in China's overheated internet and tech sectors "a bubble waiting to burst."

But Ms. Dessard said the challenges facing that key sector in the year to come will more likely prove to be a bump in the road than a turning point. Even if it makes private equity players more cautious going forward, it won't mean the end of the internet and technology story, she said.