Asia private equity outlook 2023: Shifting preferences, opportunities

Asia will continue to attract private equity investors, but these investors might also look at other markets and strategies in order to avoid pitfalls.
Asia private equity outlook 2023: Shifting preferences, opportunities

Concerning developments in China, weaker valuations, and lower performance are some of the headwinds that asset owners face in the Asia Pacific (APAC) region if they seek to deploy capital into the private equity markets in 2023.

Claire Shen, WTW

But not all is bad. As investors look for sources of diversifying cash flows in a global private market portfolio, the APAC region has its distinct economical and asset price cycles that are not highly correlated with other regions, according to Claire Shen, director of investments in Asia at WTW.

“For example, as of 3Q-22, [APAC’s] inflation pressure is much less pronounced compared to the US or Europe. There are also unique drivers of long-term economic growth, the rise of the world’s consumer market, and self-reliant tech development,” Shen told AsianInvestor.

“In a period of rising rates, multiple expansion is hard to sustain, and performance will need to be driven by nuts-and-bolts value creation. There are indications that private multiples are heading lower, amplifying uncertainty and making deals harder to close,” Shen said.

In terms of investment trends, Shen pointed out sustainability as a major driver to look for. For instance, investments in clean technology have risen significantly and are expected to grow further.

“The growing pressure by governments, regulators, and investors to speed the shift to a sustainable economy has created a significant investor focus on companies with products and services linked to the environment, renewable energies, and clean technologies,” she said.

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Within the Asian private equity market, there has been a notable risk aversion towards China in the past year. In fundraising, APAC recorded the steepest drop measured by both amount and percentage (-66.9%), driven by notable risk aversion towards China-focused funds, according to Preqin data. Here, a structural slowdown in China’s residential property market and ongoing lockdown measures have weighed on activity.

The sharp decline in China-focused fundraising started in Q4 2021, when less than $5 billion was closed compared with the $21 billion quarterly average over the past three years. China-focused private equity funds raised a total of $6.7 billion in the first three quarters of 2022, which was just 7.9% of the 2021 total. 

Total deal value in Asia by the third quarter of 2022 was $61.1 billion, or 59.3% of 2021. Again, the shortfall came mainly from China, which recorded 51.2% of the 2021 total value. 

Angela Lai, Preqin

“As we enter 2023, the China economy would be a key area to watch as the largest PE market in APAC so far, and is also where most AUM in the region currently lies. More generally, investors should also look at public equity markets as a gauge for asset valuations and appetite for deals, as well as the path of inflation and interest rates,” Angela Lai, senior research analyst at Preqin, told AsianInvestor.

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Inflation increases businesses’ operating costs and compresses margins, whereas higher interest rates are a monetary response to inflation. Their impact is twofold, first at the financing of cash flows and then at the asset valuation stage, as discount rates also go up.

Therefore, as high inflation and interest rates take centre stage in 2022, private equity returns are braced for a substantial moderation, Lai explained.

When Preqin conducted its investor survey in November 2022, half of private equity investors were already expecting their returns to worsen over the next 12 months, and close to 60% of investors highlighted rising interest rates as a key challenge to performance.

The exit environment has weakened considerably across APAC PE, having been another key concern of investors. Preqin expects that as exit transaction pricing continues to track valuation multiples in the public markets, some fund managers may delay exits to focus on value creation, while awaiting more favourable valuations. This would result in slower distributions and longer fund holding periods, which would lower the time-weighted performance of private equity overall.

“Generally, we expect PE valuations to remain weak over the near term, in line with public markets, and some more correction to be reflected in the performance of existing portfolio investments due to some revaluation time lag to public markets,” Shen said.

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In terms of performance, Preqin expects PE performance to moderate over the next few years, according to its Future of Alternatives 2027 report. For APAC, Preqin expects that the strong returns of 16.6% seen between 2018 to 2021 will reduce to 11.6% from 2021 to 2027.

“Overall, our forecast for APAC private equity is more conservative than in other regions, but this could change as the dynamics in the region evolve,” Shen said.

For example, if swift government policies in China facilitate a soft landing for the property sector, together with effective post-COVID-19 stimulus, this might warrant more positive assumptions, as would a strong rebound in public markets. On the other hand, a sudden and severe deterioration in the Chinese economy would pose further downside risk to our forecast and should be one key region to pay attention to.

“In the meantime, the crunch in fundraising for China-focused funds sees attention shift to the less crowded markets such as India and Southeast Asia, where more bite-sized growth opportunities may be preferable in a risk-off environment,” Shen said.

This was apparent in the results of Preqin’s latest investor survey in November 2022, when China had slipped behind both Southeast Asia and India in terms of investor views. Since these countries are less mature private equity markets with smaller bases, Preqin has a more positive outlook on the venture capital space in Asia.


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