HONG KONG (Reuters) - Private equity-backed mergers and acquisitions in Asia are set for their worst start to the year in nearly a decade, as a lull in dealmaking in China and broader economic and geopolitical uncertainties dragged on sentiment, data showed.

PE-backed M&A in Asia totalled $13.5 billion over January to March 19, down 32% from the corresponding year-earlier period, marking the worst first quarter since 2015, preliminary data from LSEG showed. That compares with a 21% rise in global PE-backed deals to $136 billion, it showed.

PE firms in Asia are sitting on record levels of dry powder, or unspent cash, but slowing economic growth, high rates, volatile markets and geopolitical tensions have curbed their investments and exits, and affected fund managers' ability to raise new fund, consultancy Bain & Co said in its 2024 regional PE report published on Monday.

"Exits will have to happen," Sebastien Lamy, Tokyo-based co-head of Bain & Co's APAC PE practice, said. "The longer holding periods, aging portfolios - it's not just putting pressure on returns, but it's putting pressure on the ability to re-raise."

According to data provider Preqin, PE funds' exits in Asia via IPOs, trade sales or secondary buyouts slumped 51% to $4.9 billion in the first quarter, the lowest since the first three months of 2014.

China's lull was a key contributor to the regional PE-backed M&A decline, with such deals in the world's No.2 economy nearly halving in the first quarter, LSEG data showed, as an economic slowdown and Sino-U.S. tensions dampened investor appetite.

Paul DiGiacomo, Hong Kong-based managing partner at investment bank BDA Partners, said a large portion of the global PE community were "really circumspect about investing" in China.

SIGNS OF RECOVERY

Only $12.1 billion worth of capital via 28 funds was raised in the first quarter for Asia Pacific, Preqin data showed, the lowest quarterly value since January-March 2014. In the last five years, an average of 313 funds were raised every quarter.

Unspent PE capital in Asia reached $549 billion by June 2023, with unrealized value of assets funds have yet to sell totalling $2.3 trillion, both record highs, according to Preqin.

Signs of a recovery are, however, emerging with hopes of a pickup in the coming quarters, bankers and lawyers said.

Marcia Ellis, Hong Kong-based global co-chair of PE at law firm Morrison Foerster, said middle-market deals are happening, especially in Southeast Asia. Middle Eastern funds are also eyeing raising their percentage of assets in China, she said.

A number of funds are exploring potential privatisations of Hong Kong-listed companies.

"People are signing up to run processes and processes are moving a little faster," said BDA's DiGiacomo. "Asset valuation expectations from buyers are getting more in line with those from sellers. I would expect M&A volumes to increase in 2024."