This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on April 11 - 17, 2016.

Despite the economic turbulence around the globe, Asia-Pacific’s private equity (PE) industry recorded its best year ever in 2015, in terms of the value and number of deals. According to Bain & Co’s Asia-Pacific Private Equity Report 2016, released on April 1, deal value rose a historic 44% last year to US$125 billion — about double the average of the past five years. Deal count increased 34% to hit a record 955, surpassing the 900 mark for the first time. Another record, the average deal size swelled to US$131 million, a whopping 45% higher than the five-year average. 

The Greater China region (China, Hong Kong and Taiwan) led the charge in both value and deal count. Deal value in Greater China grew 56% last year to US$69 billion, accounting for about half the region’s total. India and South Korea also posted record deal flows, while Southeast Asia and Japan saw PE activity subside last year. 

Despite the volatility in equity markets, exit activity across the region remained strong at US$88 billion. Greater China drove more than half of the exit value in the region, spurred by several large IPOs. 

While 2015 was an exceptional year for deal-making, Suvir Varma, who leads Bain’s Private Equity Practice in Asia-Pacific, says this year is expected to be much softer. 

“As the macro story across the region deteriorates, PE is wading into unfamiliar territory — a slower growth environment that will make it much more difficult to find good companies, improve their performance and exit them at market-beating returns,” he adds. 

According to the report, there was a surge in megadeals last year that were valued at more than US$1 billion, particularly in China and South Korea. This accounted for more than a quarter (43%) of the total transaction value across the region — more than double the value in 2014. The increase was attributed to public-to-private buyouts, which soared to US$17 billion in value and translating into 14% of the total PE deal value. This was more than three times the five-year average. 

There was robust activity among large institutional investors and sovereign wealth funds, which co-invested with traditional PE funds in 74 transactions representing US$36 billion in value last year.

The internet sector was the most popular in Asia-Pacific, where investors ploughed a record US$36 billion into 371 internet-related deals and another US$15 billion in 141 technology companies. According to the report, the number of companies offering internet-based solutions is growing, as digital technology “increasingly defines the daily routine in middle-class China and India”. This has generated interest among PE funds looking for growth in the midst of a challenging economy. Media, healthcare and financial services also attracted fresh interest last year. 

Looking ahead, PE executives in Asia-Pacific name China’s economic slowdown as the “true test for the PE industry’s resilience and creativity in the coming year”.

According to Varma, how the PE market develops will differ based on where in Asia-Pacific one is looking. “The stories won’t be the same across geographies and sectors, which will require funds to abandon their one-size-fits-all strategies to identify profitable opportunities.”

He adds that PE funds will need to be well equipped to thrive in tumultuous times. “The most successful of the pack, regardless of geography, share one key trait — they quickly transition from thinking as acquirers to acting like value creators. The clarity of their insights, the quality of their due diligence and the discipline with which they price assets all represent the first steps in mobilising the right value-creation strategy and executing on it.”

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