Bain Capital’s second Japan middle market fund will be at least twice the size of its predecessor, but even this enlarged capacity is said to be significantly outmatched by demand.

Japan middle market became the hook for Bain’s sixth pan-Asian fund, which is also in the market. LPs were told that every USD 10 committed to Asia would trigger a USD 1 allocation to the Japan fund, according to two sources familiar with the situation.

Soon, it became clear that demand for the Asian fund on a standalone basis would exceed supply. So, the sources added, it was suggested that investors backing other Bain strategies globally would be treated favourably in terms of allocations to Asia.

Bain declined to comment on fundraising. Suffice to say, those two funds are expected to close at or beyond the targets of USD 2bn and USD 7bn, respectively.

The situation is a microcosm of a broader dynamic whereby LPs are seen as willing to re-engage with Asia after a couple of years of holding back, but to the extent they are putting capital to work, it is going to a small subset of managers. This raises questions about the prospects for much of the region’s middle market and which groups are best positioned to survive a seemingly inevitable shakeout.

“We believe pan-regional funds could account for nearly 60% of total capital raised in Asia in 2025, which is very high by historical standards. LPs are saying they want exposure to Asia, but with managers that have proven performance,” said Sunil Mishra, a partner at Adams Street Partners.

“They also believe that, given the market backdrop, it makes sense to have diversified exposure to the region, although this is likely to result in being overweight in the large-cap space. Another option worth considering is building up a portfolio of country funds.”

Commitments to Asia-based private equity and venture capital funds, excluding renminbi-denominated vehicles, stand at USD 57.8bn for the year-to-date, according to AVCJ Research. The 2024 total of USD 60bn could well be eclipsed – a Bain first close before would ensure it – but that represented an 11-year low.

Fewer than 20 funds have surpassed USD 500m, and two sit comfortably ahead of the rest. EQT claims to have surpassed the USD 12.5bn target for its ninth pan-regional fund, including commitments signed but not yet closed, with a final close at the USD 14.5bn institutional hard cap set for early 2026. Blackstone, meanwhile, has reached the USD 10bn mark on its third Asian fund, having set out to raise around USD 11bn in total.

EQT and Blackstone account for more than one-third of all capital raised; exclude venture capital, and the share is close to 45%. This is new territory for the industry. Over the past 10 years, pan-regional funds of USD 3bn and above have contributed 20% to PE and VC fundraising on an annual average basis.

Bifurcated market

Large-cap managers claim to be seeing increased demand for Asian exposure. “People have shrugged off China; they are very interested in Japan and India, and they look at it and feel they are underexposed,” said David Gross, co-managing partner at Bain, told AVCJ.

These sentiments have been echoed over the past week at Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit by senior leaders from KKR, EQT, and Warburg Pincus. Two key themes emerged: LPs looking to diversify US-heavy exposure in response to trade actions initiated earlier in the year; and the notion that sensible portfolio construction requires a slice of Asian growth.

Jeffery Perlman, CEO of Warburg Pincus, told the summit that geographical rebalancing means bringing US exposure from “hyper-exceptional down to exceptional,” not from a hyper-exceptional level to a normal level. He estimated this could translate into a five to seven percentage point swing in allocations.

“Do they steer that capital to Europe? Or do they steer that capital to Asia? I think when they look at it, they see Asia with 50% to two-thirds of global growth over the next decade,” Perlman said, making the case for the marginal dollar ending up in Asia.

Industry participants elaborate on this view in different ways. Investors open to reengagement tend to have some history with Asia – they have been sitting out since COVID-19, they aren’t new arrivals. Sentiment is warmer in Europe than in the US. Above all, there is a lot more talk than action. Most LPs outside of asset managers have single-digit Asia allocations and lack the flexibility to enact rapid change.

In this context, size can be an impediment. British Columbia Investment (BCI), for example, has a USD 33.6bn (USD 24bn) private equity portfolio split evenly between fund commitments and co-investment. Asia accounts for 13%-14% – around the mid-point of a 10%-20% target range – and it is deployed across only five managers. One big co-investment could therefore move the needle.

“We are still hitting 12%-15% returns in North America and Europe broadly, while returns in Asia have been flat,” said Jim Pittman, BCI’s global head of private equity, told AVCJ.

“We don’t try to time the market. We are happy still having plenty of money to invest in Asia from funds raised two, three, four years ago. We will do extension periods for some of these GPs because they haven’t been able to put the money out.”

Moreover, the prospect of Asia taking the lion’s share of a five to seven percentage point swing away from the US causes some LPs to warn of repeating past mistakes. Doug Coulter, a partner at LGT Capital Partners, observed that Asia received about one-third of all capital raised for PE and VC globally in 2019, up from single digits a few years earlier, and it led to rapid deployment and poor performance.

“The key issue was that returns were never available at scale, as many investors were used to in the US market,” he said. “Of course, some managers and deals performed spectacularly well, but a more gradual approach to building exposure would have produced stronger results.”

Global private capital fundraising fell for the third year in a row in 2024, according to Bain & Company. In an environment that remains challenging, a willingness to consider Asia counts for a lot.

Ricardo Felix, a partner and head of Asia at placement agent Asante Capital, quantifies a successful 2026 as the Asia share of global private equity fundraising returning to double digits for the first time in half a decade. He is confident this will happen and expects to see a broader set of GP beneficiaries.

“While LP commitments to Asia are relatively concentrated in the larger players, it is no longer just the top 5% performers getting the most traction, but the top quartile,” Felix said. “One year ago, many LPs wouldn’t even look at top quartile in Asia because it didn’t compare to what they could get in the mid-market in the US.”

Public equities first

This measured recovery is characterised by a slow ripple effect through asset classes. It is telling how frequently improving sentiment on Asia private equity is referenced alongside stronger public markets.

The region has certainly flourished in that regard. While the S&P 500 is up 15% year-to-date, indices tracking the Hong Kong, Shanghai, Tokyo, and Seoul markets have posted gains ranging from 27% to 62%. India is the exception, but it enjoyed a stellar 2024. Renewed IPO activity has followed, notably in Hong Kong and mainland China, enabling PE and VC investors to achieve liquidity.

The effect is helpful rather than transformative, given the huge backlog of minority equity positions that have yet to be exited. LPs have responded by putting more money into liquid strategies, including within alternatives, according to Chris Lerner, group chairman of Thrive Alternatives, which primarily provides placement agent services. PE and VC must wait until they get more comfortable.

“Many of the underlying structural challenges in Asia remain in place, including regulatory considerations, geopolitical dynamics, the exit environment, and the fact that Asia is still not primarily a control market,” Lerner observed. “That said, we are beginning to see meaningful shifts on the fundraising side, which is encouraging.”

To the extent LPs are committing capital, it is closely aligned with performance. EQT and Blackstone can both point to post-2017 Asian funds that have money multiples equal to or better than those of flagship global funds of similar vintages. KKR is in a similar position with its third and fourth Asian funds, which it expects to account for half of global private equity distributions this year.

In the eyes of many LPs, these managers are – to varying degrees – known for their track records in Japan, India, and Australia. Those markets have led Asia by private equity exit proceeds post-2021. Interest in country-focused managers duly follows this pattern.

“There is most interest in Japan and India, no doubt,” said Liam Coppinger, senior managing director and head of Asia private equity, Manulife Investment Management. “I feel like I’m doing reference calls almost every week on Japanese and Indian mid-market GPs or pan-Asian GPs that operate in India.”

Manulife is on track for a record year in terms of distributions from its Asia private equity programme. India and Japan are the geographical outperformers, with a ramp-up in co-investment delivering additional alpha. LGT and Adams Street have seen an uptick in capital yield over the past 12 months as well, though the origins are broader, with China and continuation vehicles (CVs) also in the mix.

Viewed on a country basis, fundraising data shows a slowdown in China and record levels of activity in Japan. There is no balance between the two. LP commitments to China in 2018-2021 amounted to USD 125bn. Approximately USD 48bn has been raised since then. Over the same two periods, fundraising for Australia, Japan, and India combined is up slightly, reaching USD 110bn in the latter period.

Feast and famine

Only a portion of capital previously allocated to China is being rerouted elsewhere in Asia, but enough to expose a lack of depth. Most Japanese funds are coming in oversubscribed – including spinouts – and established GPs are frequently stepping up in size. Advantage Partners and NSSK are currently targeting JPY 250bn (USD 1.65bn) and JPY 200bn, respectively, roughly twice what they raised in the last vintage.

According to Lerner of Thrive, LPs with no existing exposure to Asia are among those mulling Japan, often debating the merits of backing a pan-regional fund versus adding single-country relationships as required. Industry participants claim other investors are approaching Japanese GPs ahead of fundraises to lock down commitments. And then there’s an LP constituency that is increasingly uncomfortable.

“We are very concerned about fund sizes,” said Edmond Ng, a managing partner at Axiom Asia, highlighting the dangers of strategy shift. Others have forgone Japan for this reason. Eighteen months ago, the Dietrich Foundation, which has traditionally maintained a high allocation to China, was contemplating a Japan debut after a decade of tracking the market. But it isn’t going to happen.

“There’s too much money coming in,” said Edward J. Grefenstette, CEO and CIO of the foundation, which has USD 1.5bn in assets under management. “We decided that, while there is understandable basis for that, GPs are going from USD 200m to USD 500m to USD 1bn in size, and they don’t have the experience or bandwidth. We are sceptical as to how so much capital can be deployed well.”

Dietrich has put China on pause in recent years, largely because portfolio managers have been slow to return to market. It will remain involved, though, with Grefenstette describing China as “the least crowded trade in the world right now,” though he accepts this is a contrarian view in US investor circles.

Yangge Seaman, who leads private investments for a USD 3bn foundation under Children’s Health System of Texas, is similarly minded. She inherited three China relationships on joining in 2021 and is in the process of adding more. Asia is not being prioritised beyond China, partly because – relative to the US – private equity returns in the likes of Japan aren’t seen as justifying the risk.

“The last vintage I committed to China was 2022. We skipped 2023 and 2024, but this year I’ve been back three times. The tide is certainly turning in terms of VC and public markets,” said Seaman.

This optimism is largely rooted in early-stage strategies and a belief in China’s status as an emerging technology superpower in areas like artificial intelligence (AI). Other LPs are finding different ways in; LGT, for example, is targeting China secondaries with an emphasis on near-term liquidity. For the majority, though, China remains on the margins, especially for private equity.

“I don’t see that capital going to China. You read more headlines about renewed interest, but it’s too difficult geopolitically [for some investors] and performance has [generally] been poor. Some groups will raise – several are likely to come back to market next year – but it will look very different,” said Manulife’s Coppinger.

His assessment of Asia outside of Japan, India, and the pan-regional space is characterised by mixed fortunes: a few fast fundraises, a lot of question marks. In fact, this could be applied to Asia middle-market fundraising across nearly all geographies in 2025.

The favoured few

ChrysCapital Partners and Pacific Equity Partners closed funds that rank among the largest ever raised for India and Australia. Both were quickly oversubscribed. Creador and Quadria Capital stood out in the India-Southeast Asia corridor by comfortably exceeding their targets, although Creador was much quicker. In South Korea, Glenwood Private Equity raised secured global capital for the first time.

They sit alongside EQT and Blackstone in a USD 500m-plus category that hasn’t been less than 20-strong in more than a decade. The eight-year rolling average through 2024 is 35.

It remains to be seen whether this is the new normal. Asante’s Felix believes LP bias towards developed Asia and India was a knee-jerk reaction, and the impact will fade. Another view is that a broader change in sentiment cannot happen until more liquidity comes out of China.

“We need China’s backlog to clear to bring us back to where we were before COVID. Even with exits in markets like Japan and India, the total is still small compared to the capital deployed over the past decade,” said Michael Liu, a managing director at Future Standard, who sees CVs as a potential solution.

This fits the narrative of LPs seeking Asian exposure but concentrating on managers with proven returns, which may well include supporting expansion strategies launched by established players. Adams Street’s Mishra sees three funds as the tipping point for mid-market GPs seeking to demonstrate longevity.

“A lot of firms in Asia have yet to reach three funds and now face a tough fundraising environment. The industry is going through its first-ever global consolidation wave. There will be new offerings coming from existing platforms, but there will likely be fewer new managers,” he said.

Restricting its sample size to independent GPs that have reached final closes on US dollar funds under flagship strategies since 2021, AVCJ Research identified just over 60 groups in Asia that have raised a Fund IV. About one-third of that number have done a Fund VI, and only a handful have got to Fund VIII.

LGT’s Coulter also subscribes to the notion of Asia PE undergoing a reset. LPs are dialling back to circa 2005 in terms of expectations and allocations – prior to the global financial crisis and the subsequent China-driven boom – and they will have their pick of a thinned-out manager set comprising those with track records, more institutionalised setups, and deeper sector specialist and operational capabilities.

While this may ultimately be healthy for the industry and facilitate the rise of new managers, getting there will be painful. There is already a gap in the middle market between LPs that write cheques of USD 5m-USD 10m and those in USD 35m-plus territory. Local pools of capital can play a larger role, but size and maturity vary by jurisdiction. A degree of creativity is therefore required.

Lerner of Thrive is already advising emerging managers to operate on a deal-by-deal or project fund basis until they can articulate their institutional edge and demonstrate a repeatable strategy. Certain LPs will support such arrangements because it removes blind pool risk and can lead to better economics and easier underwriting. Indeed, deal-by-deal could become a solution for new and old players alike.

“GPs are fighting not to do that, but they will bow to reality eventually and get on with it. Some expensive investments were made in 2020-2022 that don’t look too good, and now fundraising is difficult,” added Axiom Asia’s Ng. “It is time to try to salvage track records through project funds.”

[Editor’s note: Amended to clarify that the Japan middle market became the hook for Bain’s sixth pan-Asian fund, not its ninth as previously stated.]