Asian private equity funds pile up

new funds in China, in the latest sign of the region’s appetite for nonpublic investments.

The returns haven’t lived up to the hype. Funds focused on Asia generated an internal rate of return (IRR) of 12.8 per cent last year, down from 15.5 per cent in 2018, according to Preqin. That’s below what investors could have made outside the region: North American funds chalked up an IRR of 16.4 per cent in 2019 while those centred on Europe returned 18 per cent.

Big names sputter too

2019. Over the same period, the MSCI Asia Pacific Index dropped 3.3 per cent.

It’s getting harder for private equity firms to realise returns by selling companies on stock markets as the world realises that not all hot tech start-ups will be IPO winners. Much of the privateequity action in Asia has focused on China, which has also had its share of setbacks.

The US-China trade war has also had a damping effect, with some private equity-invested companies finding themselves embroiled in the tensions.

All that considered, it isn’t surprising that the value of private-equity backed trade sales dropped 14 per cent to $28.5 billion last year, while share sales by private equity owners slumped 27 per cent to $6.4 billion, declining for a third year to the lowest since 2013.

While the US-China phase one trade deal offers some hope, money is still likely to keep piling up in Asian private equity. For one thing, there aren’t many better alternatives. Institutional investors need to diversify: They can’t keep all their funds in US equities, even if these have been going gangbusters for years.

But that doesn’t mean individuals need to follow suit. Private equity investments are more risky because they are illiquid and take years to pay off. Smart investors should see the ever-growing piles of dry powder as a sign of danger rather than success.