BoaML PE team spins out

As Western investment banks come under increasing pressure to minimize their risk - and have thus shed their alternative asset investment units - Bank of America Merrill Lynch (BoaML) has taken a unique stance in the spin off of its private equity business, seeing its head professionals launch an independent, direct secondaries-focused firm backed by the region's top LPs.

NewQuest Capital Partners, backed by a consortium consisting of Paul Capital, HarbourVest Partners, LGT Capital Partners and Axiom Asia, has acquired "substantially all" of BoaML's non-real estate private equity portfolio in Asia, launching the $400 million NewQuest Asia Fund I, L.P., to manage the assets. NewQuest has inherited more than 20 growth-equity and buyout assets, primarily in Chinese and Indian companies, for an undisclosed value. Aside from these markets, the fund will focus on regional opportunities in Japan, Korea, Taiwan and Singapore.

The BoaML Asia private equity team led Darren Massara as Managing Partner will continue to manage the portfolio as part of NewQuest Capital Partners. Team members Amit Gupta, Bonnie Lo and Min Lin will all join as Partners.

A secondaries decision

While Asia has seen a handful of spin offs by captive private equity funds, NewQuest aims to differentiate itself by focusing on direct secondary market targets - an area which NewQuest's leaders says offers an unfulfilled niche in the region.

"When you look at the traditional private equity market in Asia, it's very crowded with the focus predominantly on providing primary growth capital to companies through the acquisition of minority stakes. There have been buy-out transactions, but they are less frequent compared to traditional growth capital private equity deals." Massara told AVCJ.

"If you look at other regions of the world, however, you find that the direct secondary part of the market - buying secondary shares rather than primary shares, is much more robust. In Europe, about 50% of all PE exits have been exited to GPs or investors through secondary sales. In the US it's lower at about 30%, but in Asia, we're talking only about 10% and that's largely limited to the buy-out markets of Japan, Korea and Australia. We think that it is largely due to the fact that there are a limited number of buyers focused on that part of the market"

Massara explains that the size of Asia's un-exited deal market is roughly US$150 billion. With an average deal size of approximately US$30 million, that translates to approximately 5,000 un-exited positions in Asia today. "We very conservatively estimate that investors which hold these positions would seek to monetize at least 20% of their holdings today. This amounts to roughly 1,000 deals or about US$30 billion of principal invested in Asia which we would consider to be immediately actionable," he adds.

In terms of sourcing, Massara points out that there are other entities just like BoaML looking to offload their portfolios, such as hedge funds looking to reduce their balance sheets, or corporate and family offices looking to unload current assets.

An LP state of mind

Fundraising is not a priority for the time being given that the NewQuest Asia Fund I is currently closed, given the funding contributed by four LPs. The vehicle will adhere to a traditional structure, aside from a slightly shortened life cycle for some of the assets BoaML had held in its portfolio for the past years. Massara notes that the firm may announce its first exits in the coming months, and as well as new investments.

"The fund currently has $400 million, of which a significant amount of that is dry powder for new investments," says Jason Sambanju, Co-Head of Paul Capital Asia, NewQuest's cornerstone LP. "One way to tap into more capital is thru NewQuest's existing LPs. So when the opportunity to increase the fund size arises, we can easily step up to put more money to work."

The BoaML-cum-NewQuest team began discussions with Paul Capital, HarbourVest, LGT and Axiom in early 2009, when rumblings of change first surfaced. The process of spinning off the private equity unit was a long process, Massara and Sambanju tell AVCJ, given that three different parties - the GP, the LPs and the investment bank - each had to agree to terms.

From the LP perspective, Sambanju says Paul Capital and the other LPs recognized the opportunities ahead of them when signing onto NewQuest, namely to scope out their own secondary targets backed by a reliable management team. In the past, he adds, Paul Capital would "have to pass on opportunities" because secondary portfolios up for grabs did not have managers. "This is a significant milestone," Sambanju says.

Another anchor LP, HarbourVest, has engaged in similar arrangements. In 2009, the firm supported the Lehman Brothers Venture Partners' management team spin off, as well as that of Phase4 Ventures, Nomura's life science VC business, which had a significant portion of its assets sold to HarbourVest.

"It's very interesting for us because there's obviously been a lot of capital flowing into Asia the past few years, and the market place has become more competitive," says David Atterbury, Principal at HarbourVest. "With that we see a future for NewQuest because it's a first mover looking at the direct secondaries market. It's differentiated itself and will be looking at slightly different deals, and in terms of its strategy, NewQuest's is very viable."

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• Topics
• GPs
• LPs
• Secondaries
• Bank of America Merrill Lynch