APAC private equity dry powder falls amid fundraising slump and market uncertainty

How will APAC fare with private equity dry powder at a record low as a proportion of total AUM?

Global private equity dry powder is at an unprecedented $1.89tn as of June 2022, up 16% from December 2021. APAC-focused private equity dry powder is also standing high at $358bn, albeit dipping 6% year on year. Upon a closer look, the proportion of dry powder when compared with total assets under management (AUM) are at a record low of just 16%. This percentage dips further when zooming into venture capital. APAC-focused venture capital dry powder stands at $144.1bn as of June 2022, constituting only 12% of total asset class AUM, or less than half of the 10-year 26% average proportion. 

Two things have converged to cause the falling proportion of dry powder against total AUM. First, fundraising has indeed slumped in China, the heavyweight fundraiser in the past few years. Second, deal valuations shot up due to competition for assets. 

Fundraising on the decline 
APAC-focused private equity fundraising has been declining since its peak in 2017, which saw 2,062 funds raising $324.29bn. In 2022, 363 funds raised $84.13bn. The aggregate capital raised is 57% lower than 2021, and 52% lower than 2020. In contrast, North America-focused private equity funds raised $545.90bn in 2022, up 7% year on year, despite a lower number of funds.  

APAC’s aggregate fundraising fell significantly due to China’s regulatory shocks on the consumer tech sector and persistent COVID-19 lockdowns well into 2022. Tensions between the US and China have also added more reason for investors to remain cautious regarding the region. Greater China-based private equity fund managers raised only $36.30bn in 2022, just 28% of what was raised in 2021 and significantly lower than previous peaks in 2016 and 2017, when $290.88bn and $285.73bn were raised, respectively. 

Although private equity managers based in India, Australia and the ASEAN economic region saw higher levels of capital raised in 2021 and 2022, the increases did not compensate for China’s drastic drop. India-based private equity fundraising peaked at $5.26bn in 2021, more than doubling 2020’s $2.34bn and remained relatively buoyant at $3.92bn throughout 2022. ASEAN-based fund managers raised a record $8.55bn in 2022, 23% higher than 2021 and 124% higher than 2020. 

It’s also interesting to note that within ASEAN, some countries have fared better than others. Read how private capital fund managers in Singapore have managed to raise record levels of capital. 

However, amid this rather gloomy fundraising outlook, certain APAC-focused mega-buyout funds stand out. KKR’s Asian Fund IV achieved final close at $13.7bn in 2021, currently the largest private equity fund dedicated to APAC. Last year, Blackstone Capital Partners Asia II closed at $11.0bn in January, while BPEA EQT’s Asia Private Equity Fund VIII closed at $11.2bn in September. These well-established funds will seek to deploy high amounts of investible capital even in the face of challenging macroeconomic headwinds. 

Deal valuations still high
The high levels of dry powder accumulated in recent years have led to competition for assets, thus pushing up valuations. Dealmaking at high valuations, in turn, erodes dry powder more quickly. For illustration, the average venture capital deal value in APAC shot up to $226.6bn in 2021, up from the previous record of $151.3bn in 2018. The figure stood at around $130.8bn in 2022. Likewise, the average deal value of private equity-backed buyouts in APAC was a record $245.8bn in 2022, surpassing the previous record of $166.0bn in 2021 by 48%. 

However, equity valuations have been falling in 2022 globally. If APAC also mirrors the same trend, fund managers should be able to find more deals at attractive valuations. This will slow the erosion of dry powder to some extent in a muted fundraising environment where investors are in risk-off mode.

Globally, market uncertainty and volatility over the past couple of years has not slowed the growth of private equity AUM, which stands at $7.99tn as of June 2022. Almost a third, or $2.18tn, are focused on APAC, up from 20% in 2017. Investors continue to look favorably toward APAC as a region with young and tech-savvy populations, and a growing middle class that drives economic growth.