Private equity investors in Asia-Pacific are paying more for returns and having to look harder for them as the industry there decelerates slightly from a period of bumper outcomes.

Private equity funds in Asia are no longer able to make easy money by buying companies at cheap values, and are having to stretch more in the hunt for returns, a report on the region's market from consultancy Bain & Co has found.

A few warning notes were issued in a report that generally painted a glowing picture of the Asia-Pacific private equity sector. Investment momentum eased in 2016 due to a drop in the number of megadeals and softened deal activity.

"Deal value slowed but remained solid, decreasing to $92 billion - down from $124 billion in 2015.  Deal count also dropped to 892, after peaking at more than 1,000 the year prior," it said.

Private equity, along with other forms of investment outside listed markets, has become more significant for wealth managers such as family offices and private banks in recent years, with investors accepting less liquidity as the price for obtaining yield in a world of often modest returns and ultra-low interest rates.

"The market continued to benefit from investor interest in Internet-focused opportunities, mostly in China and India, which comprised more than one-third of deals last year. In parallel, government and institutional investors remained an important part of the private equity landscape, driving 57 per cent of deals worth $1 billion or more, as opposed to 18 per cent for global buyouts. Yet, Asia-Pacific funds are still sitting on an ample supply of dry powder, which has remained largely flat," the report said.

It went on to say that after two years of vigorous activity, exits tailed off last year, partly due to a weak equity market in China that hobbled initial public offerings - a key source of exits for PE funds. Bain & Co said that in other APAC countries, the drop was a function of few remaining large assets that were ripe to sell. This eased exit value in the region from an all-time high of $115 billion in 2014 to a historically normal level of $74 billion. India, on the other hand, was fertile ground for exits last year, as was South Korea and Southeast Asia, thanks to a handful of large exits.

“After a record-setting 2015, we anticipated last year would be a much tougher deal-making environment - one that would make it more difficult for PE funds to generate market-beating returns,” said Suvir Varma, who leads Bain’s private equity practice in Asia-Pacific.

As a sign of the hunt for returns, the report showed that deal multiples reached new heights in Asia, outpacing levels in the US – at 17 times and 10 times, respectively. This, together with tightening interest rates, squeezed traditional profit sources, causing PE firms to rely far less on traditional levers and look to new sources of value, Bain & Co said.

Bain surveyed about 120 general partners (GPs) and direct investors from across the region and found that about a fifth (22 per cent) said they considered cost and capital gains to be the most important source of returns for deals exited five years ago; 6 per cent cited M&A.

Looking ahead five years, these factors are expected to increase dramatically in significance, with 37 per cent of GPs pointing to margin efficiency and more than 20 per cent to M&A. On the other hand, most respondents anticipated both multiple expansion and leverage to go down.