Led by China and India, deal value across Asia-Pacific in 2018 broke the above the all-time high of 2017, but several market developments could affect investment activity and returns in 2019.

Powerful momentum has helped Asia-Pacific's private equity industry to set new highs, with deal value in 2018, at $165 billion, surpassing 2017's record-breaking $159 million. This was led by China and India, which together made up 75 percent of total deal value, according to Bain & Company's «Asia Pacific Private Equity Report» published Friday.

Asia-Pacific's share of the global private equity market is now 26 percent of the global total, up from 9 percent just one decade ago, with $883 billion in assets under management.

«Over the last several years, private equity in Asia Pacific seemed to be unstoppable, and 2018 reinforced that trend in terms of record-breaking deal and exit values. But we’re seeing warning signs that suggest the party may be coming to an end, at least for some investors,» said Kiki Yang, who leads Bain's private equity practice in Asia-Pacific.

According to Bain, the number of exits of companies sold for less than $100 million fell 58 percent to 205 in 2018, while the number of exits larger than $500 million rose 26 percent to 59.

Large Exits Dominate

Exit values also reached a record $142 billion in 2018 –up 39 percent over the past five-year average. However, the total number of exits declined sharply to 402, down 32 percent from the past five-year average. Large exits dominated – exits of $1 billion or more were almost 60 percent of total exit value, and the average exit value doubled to $353 million compared with the average for the previous five years.

«Disconcerting» Market Developments

However, the report cited three «disconcerting» market developments that may affect investment activity and returns in the coming year: U.S.-China trade tensions, rising interest rates, and large funds that dominate activity in the region, which is creating a «winner-takes-all» dynamic.

«The increasing market bifurcation and gathering macroeconomic headwinds that we’ve hinted at in the past are starting to materialize, potentially slowing the revenue growth and multiple expansions that have historically propelled Asia-Pacific PE returns. This means that vulnerable and less differentiated funds could disproportionately bear the brunt of a downturn,» Yang said about these developments.