The private equity ( PE ) market in the Asia-Pacific region has been navigating a period of significant change and uncertainty with PE investors taking a cautious approach to the region.

PE and venture capital deal value and volume in the region, excluding Japan, for example, earlier this year fell by 85.4% to US$1.20 billion during Q1 2024 compared with US$8.24 billion during the same period in 2023, according to S&P Global Market Intelligence Data. Moreover, in 2023, Asia-Pacific PE funds raised just US$100 billion, the lowest level in over a decade, based on analysis by Bain & Company.

As well, private capital flow from US-based firms into mainland China in 2024 was muted. US private equity investment in China during the first quarter of 2024 was US$280 million and US$370 million during the second quarter. The average quarter in 2021 saw US$6.38 billion invested into China-based companies.

Despite the drop in activity, several investors, speaking during a panel session as part of the Hong Kong Monetary Authority’s Global Financial Leaders’ Investment Summit, note that it isn’t all gloom and doom for the region as there are pockets of opportunity to be found.

“Today valuations in the US are at their 97th percentile; and over the last 100 years, if you look at PE multiples, this implies that public market returns are going to be at 3% per annum,” details Jean Eric Salata, EQT Asia’s chairman. “The idea that you can continue to make money by pure market beta and multiples expansion is going to be harder to come by in the developed markets. What we are looking for in Asia is true alpha ability to generate returns, regardless of what is happening in the public markets.”

PE investors looking at Asia, Salata adds, have to consider several key positive points, including the region having a higher growth rate compared with Europe and the US. There is also a number of managed assets in Asia leading to inefficiency in the system [that investors can capitalize on]. “In Japan, you have over 1,000 companies trading below book value right now,” he points out. “And the government there is quite serious about improving shareholder governance and the efficiency of these businesses.”

There are also uncorrelated pools of liquidity in the Asian region, according to Salata, that enable investors to get capital when other markets are shut. The region is also under penetrated in terms of private assets. And, he notes, only 6% of PE allocations from institutional investors come to Asia, while 94% go to developed markets, despite the region representing half of the world’s GDP.

As well, Lei Zhang, Hillhouse founder and chairman at Hillhouse, points out the differences between Asian PE and elsewhere in the world: “This is the market where you stay close to the real economy. It is not about leverage. In this market, we look at our returns because historically the leverage in the Asian market is multiples lower than that in the US and Europe.

“This is not a financial engineering market. It is a real economy market. You’re seeing a lot of entrepreneurship in this market. This gives the opportunity for investors to access totally uncorrelated returns.”

That entrepreneurship, despite the challenges currently being experienced in financial hubs like Hong Kong, can be good value for private investors.

“Because the valuation has decreased so much, it is actually a really good time to invest in start-ups,” shares Nisa Leung, managing partner at Qiming Venture Partners. “We see the valuation on average for Series A [funding] has dropped by 30% to 40% in the market. This allows investors like ourselves to participate and really spend time on how to help these companies.

“Around 65% of our first money in is in the angel or Series A rounds. We are very fortunate to see that the Hong Kong exchange has introduced the Chapter 18A and Chapter 18C. This really allows a lot of the Chinese and Asian entrepreneurs to be able to raise additional funding to further their development, R&D [research and development] and global expansion.”