Asia private equity 2025 preview: Fundraising
Investors will be keen to explore pockets of relative positivity in Asia as fundraising momentum flounders, but there are few signs of a near-term recuperation in terms of regionwide headline numbers.
US dollar-denominated private equity and venture fundraising targeting Asia amounts to USD 35.5bn to date this year, setting up 2024 to hit a 14-year low, according to AVCJ Research. This is down 48% on 2023, which itself was down 36% from the prior year.
Of the USD 60bn-USD 90bn of capital estimated to have disappeared from China strategies in the past 18 months, around 20% is believed to have gone to Japan. Trickles went to India and Southeast Asia. The rest is in limbo or went back where it came from.
“Next year will probably be more of the same but idiosyncratic in the sense that the downturn is driven not just by an economic blip but a political blip in China. That takes longer to recover because it’s psyche-related,” said Ricardo Felix, head of Asia at placement agent Asante Capital.
“It’s not just a macro issue you can get your head around. The fundamentals of China are fine, and in most of Asia, the fundamentals are the same as they were a few years ago. But when you bring in this constant volatility about what’s happening with US tensions, that makes me feel 2025 is not going to bring a cascade of US capital coming back to Asia.”
Asante is tracking Asian PE fundraising at 8%-9% of the global total, versus a historical average north of 20%. US capital for the US has hardened as a trend. For many small to mid-size GPs in Asia, global fund-of-funds and insurers with allocations to the region have been a critical lifeline.
For example, Manulife Investment Management, which is controlled by insurance giant Manulife Financial Corporation [TSX:MFC], made new commitments this year in Japan, Australia, India, Southeast Asia, and Korea; its existing China GPs did not come back to market.
“I think you’ll see strong fundraising markets in India and Japan and potentially more activity in Southeast Asia, South Korea, and Australia,” said Liam Coppinger, a senior managing director and head of Asia private equity at Manulife Investment Management.
“I do think there is ability for those markets to soak up some capital, but there’s no market that can replace China. And with so many investors on the sidelines with China, that, overall, means that Asia Pacific fundraising is going to go down.”
Diversification plays
The prevailing expectation is that the geographic diversification away from China will be overlapped by a flight to quality in the coming year. The largest country funds will get larger, and pan-regionals will accumulate corpuses considered debatable for China-light strategies.
There will be hope for first-time managers where they can demonstrate distinctive playbooks in preferred geographies.
Seraya Partners, for example, closed its debut fund on USD 800m last December by focusing its energy transition thesis on developing markets. The thesis sticks primarily to Japan, Korea, and Singapore, leaning on defensive aspects of the theme such as infrastructure and service providers with long-term contacts.
“The hit rate we get from LPs in terms of reaching out for conversations and continuing conversations has been very high,” said Thomas Yu, a managing director at Seraya.
“The market has been saying DPI [distributions to paid-in] is low and they’re waiting for money to come back, but we’ve found that even for a first-time fund, there are still pockets of capital looking for a differentiated strategy.”
Many Asian managers will need to ramp up their environmental, social, and governance (ESG) credentials and reporting capacity to widen their potential LP pool in the coming year, especially in light of a perceived influx of European investors.
Kenneth Leong, a partner, COO and CFO at Axiom Asia, said that while US capital still takes up the bulk of his firm’s middle-market fund-of-funds offering, European LPs represented the biggest shift in terms of new entrants.
Leong frames these investors as having slightly fewer concerns about Asia than their US peers, especially state-related entities in the US such as pension funds. He describes Middle Eastern LPs in the same terms but senses a lingering hesitation.
“When I speak to some of the Middle Eastern investors, there is a level of caution when they think of where they should invest around the world, and in particular Asia. It takes a long time to cultivate those partnerships, and that is not as easy as everybody thinks,” Leong said.
“People do view them as a very good source of capital, and if you compare them to a US investor, they have a lot fewer concerns with China, for example, but the overall macro and geopolitics do still play a part.”
Leong also flagged Australia as an overlooked opportunity going forward, noting that valuations are still low versus the US and Europe. Likewise, Korea is expected to maintain relative momentum, with most investors contacted for this story dismissing the country’s political quakes of recent weeks as a non-issue for long-term strategies.
Japan still rising
Japan will be the biggest beneficiary of redirected China allocations within the region, however. Valuations are still largely seen as attractive. National challenges around ageing, corporate reform, and slow economic growth have been interpreted as private equity pluses.
Kirk Shimizuishi, Japan private equity leader at EY, believes this sentiment will prop up not only Japan’s country funds but pan-regional ones as well. Supporting evidence for this view includes Bain Capital, which has counted Japan as its primary market in the region by deal volume since 2010 and closed its fifth flagship Asia fund in November last year 40% oversubscribed on USD 7.1bn.
Blackstone [NYSE:BS], which credits Japan, Australia, and India for 90% of its Asia deal volume in recent years, is currently seeking USD 11bn for its third pan-regional fund. EQT Private Capital Asia is also in the market and recently set the hard cap for its eighth fund at USD 14.5bn. Japan is expected to feature more heavily than in prior vintages.
“Given the strong tailwinds for the Japan PE market, even those PE funds that have invested into Japan but have not generated attractive returns are seeing a fair amount of demand for their funds,” Shimizuishi said.
“Thus, for a large pan-Asia fund that has Japan as part of its investment focus, it would be expected they would receive a fair amount of demand for those funds. Any fund with that profile that comes in below its target is likely an outlier to the overall market trend and not an indication of the overall market sentiment towards Asia, particularly Japan.”