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What’s in Store for Buyouts in Asia?

Asia’s rapid rise as the main player in the global venture capital industry has brought increased attention to the region, especially as China’s venture capital market has become a strong competitor of Silicon Valley. In fact, the amount of capital invested in Asian venture capital surpassed North America in 2017, and it looks like Asia will dominate again in 2018.

The Asian venture capital industry has also already broken past records in the first three quarters of 2018: In Q1-Q3, there were 4,495 venture capital deals worth $99 billion in Asia, surpassing the previous yearly record set in 2017, in which there were 4,510 deals worth $86 billion. This makes 2018 the fifth consecutive year to see increasing venture capital deal value in Asia.

Buyout Deal Activity Lags

In contrast, however, the private equity-backed buyout deal market in Asia has not seen the same spike in growth. Unlike the Asian venture capital industry, which has enjoyed a trend of year-on-year increases in the number of deals announced, the number of buyout deals announced in the region has been slowing since a peak in 2011, when 490 deals were announced. By contrast, 2017 saw less than half of that number of deals in the region, as just 241 transactions were made. 2018 will likely not match 2011’s levels, but the number of deals announced in 2018 should surpass 2017’s levels, as the first three quarters of the year have seen 214 transactions announced.

As the number of buyout deals in Asia has been on the decline, yearly aggregate deal value has been inconsistent. 2014 and 2015 saw aggregate deal values of around $49 billion, with both years seeing successive record highs. In 2016, deal value dipped to $34 billion, but 2017 saw $66 billion invested in buyout activity in the region—a record high. That year, Asia accounted for 17 percent of aggregate buyout deal value globally, but just 5 percent of deals announced. In the first three quarters of 2018, 214 deals worth $28 billion have been recorded, representing just 6 percent of deals announced globally and 8 percent of deal value.

Three Countries Battle It Out

By region, China and India have tended to be the dominant regions for private equity-backed buyout deal activity. However, China has accounted for a falling proportion of investments made in Asia, while Japan has seen its proportion of buyout investments growing.

In 2017, deals made in China accounted for 13 percent of total investments made in Asia, a significant decrease from 2013, when the country accounted for 29 percent of transactions. The proportion of deals made in Japan, however, rose from 7.8 percent to 15 percent. India, meanwhile, has consistently accounted for about a third of Asia-based deals, making up 30 percent of transactions in 2017.

With the global private equity industry seeing further diversification, it shouldn’t come as a surprise that the Asian market is diversifying as well. In 2013, China and India together accounted for over two-thirds of deals announced (67 percent), but in 2017, these two countries made up a significantly lower 43 percent of transactions in Asia. Although both remain key countries in the Asian buyout industry, private equity players are looking at other investment opportunities across the region.

The Rise of the Consumer Sector

The key areas of focus for private equity players have evolved over the past decade as Asian economies have transformed. Ten years ago, investments made into Asia-based real estate drove buyout activity in the region, accounting for the largest proportion (30 percent) of all transactions made in 2007. However, interest in the sector has lessened since then, and real estate transactions accounted for just 14 percent of all transactions made in Asia last year.

At the same time, investments in business services have steadily increased from 10 percent of deals made in Asia to 15 percent in 2017. In the first three quarters of 2018, the sector accounted for just under 21 percent of deals, this growing proportion pushed by a rise in interest in financial services in the region.

The consumer discretionary sector has also accounted for a growing proportion of deal activity, increasing from 17 percent of deals in 2013 to 29 percent in 2017—the largest proportion of any sector that year. The main driver behind this industry looks to be retail, which is not surprising given the increasing disposable incomes across the region and the growing number of investments made into clothing stores in the region.

Looking Ahead

Despite a lack of momentum for the buyout deal market in Asia, there is currently a record $174 billion in available capital targeting investment opportunities in the region. Even if deal activity has lagged in the past, with so much capital on hand, as well as mounting investor interest in the region, buyout investments could be set to see substantial growth in the near future.

It is striking that in recent years we have seen a resurgence in investments, not in new and expanding economies such as China and India, but in more mature markets like Japan. However, as these expanding economies mature, the number of buyout deal opportunities is likely to proliferate, so we may see the pendulum begin to swing back to them.

This is good news for the future of private equity in the region. A rising number of potential investment opportunities, coupled with growing investor interest in the region—all against the backdrop of rapidly growing economies and fast-growing consumption across the region—may well spur the buyout deals market in Asia to new heights and new areas.

Christopher Elvin

Head of Private Equity Products for Preqin

Christopher Elvin is head of Private Equity Products for Preqin. He joined Preqin in 2006, and is currently head of Preqin’s private equity products and responsible for Preqin’s market leading online products and solutions.

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