There are plenty of bright spots in the outlook for Asian fundraising in 2024, but their combined voltage isn’t enough to illuminate a very dark tunnel. One lasting outcome could be closer GP-LP ties.

With private equity fundraising in Asia on course for its lowest annual total in more than a decade – excluding renminbi-denominated vehicles, USD 52.4bn has been committed so far in 2023, down 52% on last year – there are few calls for optimism about 2024. The exception seems to be that at least the industry will get better at navigating a drought.

Ricardo Felix, head of Asia Pacific at placement agent Asante Capital, estimates that Asia’s share of global PE fundraising has fallen below 10% for the first time in recent memory in 2023. He attributes this largely to an ongoing pivot away from China. Bifurcation is the byproduct.

“Only the top managers have been raising, and there’s been an increase in zombie funds and one of the highest fail rates on record. With a couple of exceptions, the GPs perceived as safe pairs of hands survive and everything else either doesn’t get there, struggles, or simply starts winding down – and there’s a lot of that in Southeast Asia, China, and India,” Felix said. “Most of this will go into next year.”

The one positive he envisages for 2024 is that fewer GPs will come to market globally. Allocations will still be limited, but with a smaller number of fund launches, the chances of securing a ticket might improve.

The idea that normally China-bound capital will be redirected within the region remains unsubstantiated, with the most presumed destinations for this capital in developing Asia exhibiting little sign of resilience. India’s fundraising across all strategies declined 78% during 2023 to USD 4.3bn. In Southeast Asia, that figure fell 47% on the year to a seven-year low of USD 3.8bn.

Several LPs and placement agents have told AVCJ over the past 12 months that developed markets in the region, especially Australia and Japan, are likely to be the biggest beneficiaries of China’s aversion in the near term, if for no other reason than their stability. Is there any reason to believe this theoretical redistribution could become more quantifiable in the coming year?

“Yes. But as of now, it is more conversations about other opportunities in Asia rather than hard dollars flowing. That is in line with the global slowdown in PE-VC fundraising this year,” said Aaron Costello, regional head of Asia at Cambridge Associates.

Who’s allocating?

Cambridge predicts China fundraising will remain muted in 2024, especially in venture, where pending US rules to limit advanced technology investment are exacerbating a vacuum of LP confidence. The fund-of-funds identified a silver lining in the idea that “fewer capital-chasing deals may result in better opportunities for investors – US and non-US – willing to tolerate the uncertainty and headline risk.”

Large fund-of-funds are among the few LP groups seen as potentially interested in adding to their Asia exposure in the coming year. Niklas Amundsson, a partner at placement agent Monument Group, has observed a recent trend of global institutional investors, including fund-of-funds and asset managers, setting up bases in Singapore to recon markets such as the Philippines.

“They’re all in Manila in 2023. I think there have been 15-16 visits to Manila,” he said in July. “I believe in 2024 or 2025 they’re going to start making investments. They’re not going to deploy a lot of money, but they’re going to do things they’ve never done before because they’re going through the landscaping exercises.”

Smaller investors happy with Asia’s market fundamentals and less driven by macro fluctuations, including family offices and emerging high-net-worth channels, will join them. Frontier market sovereign wealth funds are expected to be part of the mix too, but activity will be sporadic and experimental.

Meanwhile, development finance institutions (DFIs) do not appear set to take up the slack as capital recedes from their core markets in the region. Part of this is about exits; even where appetite remains, budgets depending on distributions are expected to continue to be strained next year.

One investment professional responsible for Asian private equity at a Europe-based DFI said his firm has been disappointed with the overall performance of PE and VC funds in the region. If this doesn’t necessarily result in a flight to quality, it does presage a consolidation.

“Many LPs are sitting on the fence, waiting for a first close to happen. They don’t want to waste time on something that may not fly,” the investor said. “So, we see ourselves doing fewer funds but trying to anchor more first closes and play a stronger role in that way.  We want to put in more money in fewer funds. The selection process will be tougher in the future.”

Balance of power

There’s an important side-effect here. As DFIs trim their GP portfolios and thereby increase the size of their commitments per fund, the funds themselves are getting smaller as a response to the wider retraction of LP interest. This doubly amplifies DFI influence and suggests that EU agendas such as the sustainable development goals (SDGs) will be implanted into the DNA of a new generation of Asian GPs.

It feeds into the logic that it will still be an LP world next year when it comes to negotiating terms and conditions, even if fewer funds come to market. That power shift will not necessarily quell the introduction of continuation funds and other highly negotiated structures, but it will allow LPs to be more active at the asset level.

“Our requirements are constantly increasing on cyber, data security, and greenhouse gas accounting, and if we have more of an anchor position in a fund, it becomes easier to leverage the things that matter to us,” the DFI investor added.

“You cannot force a fund manager to invite you to do a co-investment, so our legal wording has not changed. But as an anchor investor, we will work closer with managers, and that opens more routes to get co-investment. It’s less about changing the terms and more about intensive cooperation.”