Sundowns went in front through Peter Shalulile and Themba Zwane but strikes from Bernard Parker and Khama Billiat sent the game to extra-time and then penalties, where Chiefs saw four of their penalties saved by Downs keeper Kennedy Mweene to bow out at the first hurdle.
Sundowns were all over Chiefs in the opening half an hour - racing into a 2-0 lead - and Baxter admits his side were all over the place for most of the first-half.
"I thought at the beginning of the game we were well off it," Baxter told SuperSport TV.
"Sundowns took command with possession. The timing of our press was wrong. Positional play at the back was wrong. And our possession when we won the ball was hurried and nervous. Going a goal down doesn't help but I felt that gradually we started to play a little bit better. We found a little bit of rhythm and then came the second goal."
The English-born mentor, did however, credit his side for their improvement towards the end of the first half and in the second stanza.
"After that I think we had a period of 15 minutes where we played well and we scored a goal in that time," said the 67-year-old.
"And going into half-time, I thought if we could change a few things we can make a fist of it and the boys did and I think they played much better second-half. The balance of the team was better. We defended a little bit stronger and on the back of that even our attacking play."
Baxter then highlighted the fact that extra-time was always going to be tough on the players physically at this early stage of the season, while congratulating Sundowns for holding their nerve better in the penalty shoot-out.
"I was pleased with that but then extra-time, there's fatigue at this time of the year so neither team plays their best," said the Amakhosi boss.
"We were looking for a transition and set plays and they were looking for longer possession. Going to penalties, it is what it is. I think Sundowns held their nerve better than we did and I wish them all the best in the semis.
"It's a strong group in as much as we were 2-0 down to the champions in a game where it's very easy to cave in, very easy for players to lose whatever belief they had. But we got back and we got back to 2-2 and it could have gone either way and as I say fatigue in extra-time means that nobody plays really well. And penalties if the goalkeeper has a performance like he did. It was like Brandon had for us last week.
"It was our first game against opposition in the sharpest of circumstances. I've learnt a lot from the game. I hope the players have learnt a lot. We've got to get better and we will get better. If the players can give me 20 percent better than that, then I think we will be reckoned with."