Secondaries: Holding patterns

Intermediaries that are globally active in private equity secondaries know that they will eventually need to staff up in the growing Asian end of the market, but it remains a delicate question of timing. As a result, these players tend to take a keen interest in even isolated events that suggest the wave could be about to break. 

This effect was most recently seen in the naming of Dominik Woessner, the former head of Greenhill Cogent's secondary advisory business in Asia, as Lazard's secondaries lead in the region. The appointment has been interpreted as part of a period of scattered preparatory moves by a global advisory industry that has only tentatively begun to mobilize in its most prospective sphere of expansion.    

Secondary deals are being done in Asia with intermediation managed from outside of the region, Warburg Pincus' $1.2 billion asset sale to Lexington Partners and Goldman Sachs last year – which was run by Lazard – being a prime example. But there appears to be rising sentiment that the long-distance approach will not be sustainable for long. In the meantime, advisors with an existing footprint in the region are cross-staffing with caution, conscious that deal flow will inevitably accelerate but realistic about the still limited nature of the market. 

"We could be approaching an inflection point in Asia-Australia where the fee pool will become large enough and consistent enough that firms will want to allocate dedicated resources to intermediate activity in the region versus executing transactions from their New York or London offices," says Philip Tsai, global head of secondary market advisory for UBS. "We certainly think about it and keep a close eye on it. If you're putting dedicated resources on the ground in Asia, you need to feel certain that the deal flow is not episodic and opportunistic. We are fortunate to have resources in our Singapore and Hong Kong offices to help originate and execute secondary advisory assignments." 

Intermittent hires

For the moment, increased chatter about opportunity has not translated into direct action. Most global intermediaries, including the likes of Evercore, Park Hill and Credit Suisse, do not have a physical secondaries presence in Asia to speak of, and there is little expectation around imminent forays. Senior-level hiring by these firms in the region has been mostly on the general business development side.  

Early movers include Campbell Lutyens, which is expanding its currently 14-strong Asia team in primaries and secondaries, and Greenhill & Co, which has recently made a junior-level hire in its Hong Kong-based execution team and is planning to add two more people by the end of the year despite a hiccup in local momentum. The firm tracked a 57% increase in the size of the global secondaries market during 2017 to $58 billion, but this belied a 23% retraction in Asia.  

Greenhill & Co. estimates that Asian secondary asset sales were worth about $3.9 billion in 2017, or around 7% of the global market. It projects deal activity to pick up this year, however, with sellers taking advantage of stronger pricing and availability of secondary capital. Medium-term potential is seen as pronounced in China, where a large number of first-time funds with uncertain outlooks could drive deal flow while effectively creating a gap in locally savvy intermediation.   

"I think there is a general consensus amongst advisors like ourselves that the secondary market is set to grow as the sector slowly matures," says Simon Lam, a managing director for Greenhill & Co, noting that although deal volumes in Asia have wavered across the past two years, growth in GP-led transactions has remained an encouraging theme. "We believe it's important to be close to our clients and to have deep understanding of the assets that we are doing valuations work on – which is why we have a full execution team that is based in Hong Kong – and not just regional representatives."  

The idea that GP-led transactions are underpinning opportunity for intermediaries has emerged with the gradual de-stigmatization of the broader secondaries market. These deals – which include a range of fund restructurings – were said to increase from 25% of overall secondaries deal flow in 2016 to 35% in 2017. Advisors report that most of this activity has been in Europe, but Asia looks destined to follow suit. Recent stirrings include a $450 million stapled secondary led by AlpInvest Partners for Singapore's Southern Capital. 

Restructuring revolution?

Due to their bespoke nature, GP-led transactions are seen as the most convincing enticement for global intermediaries considering a more robust Asian presence. Although there is a prevailing sense that price mismatches have left many of these sorts of deals undone, the region is seen as potentially the biggest growth market due to a relative lack of reliability around exits. The point of contention for intermediaries trying to optimally time their entries is defining what constitutes a sufficiently dependable deal flow outlook. 

Confidence that worthwhile deals will be forthcoming can be seen in the traction of regional players such as NewQuest Capital Partners, a direct secondaries specialist that was itself created through a secondary spin-out from Bank of America Merrill Lynch in 2011. Since then, the firm has raised some $1.3 billion, expanded aggressively in the region, most recently launching an office in India, and widened its strategic focus to include more GP-led transactions. 

"These transactions require a more detailed, asset-level analysis combined with more complex arrangements and negotiation among the stakeholders –  not only between buyers and sellers, but also with the underlying managers," explains Darren Massara, a managing partner at NewQuest. "As investment activity increases around such transactions, stakeholders are going to need advisory professionals on the ground to help manage such complexities. It's really hard to do that from afar."

An influx of locally-based intermediaries looking to serve Asia's growing appetite for such deals would not be without its pitfalls. Massara warns, for example, that if global advisors apply US and European-style approaches to uniquely Asian scenarios, it could result in failed deals and a negative impact on the overall market. 

However, any physical Asian expansion by advisory firms would inherently represent a commitment to vigilance on such issues and further validate the secondary market for otherwise wary buyers and sellers – at least in theory. If this effect in turn prompts more activity in transactions that have significant diligence and intermediation requirements, the gap in secondary market competitiveness between East and West may narrow all the faster.

"Most buyers consider [intermediaries] a benefit to the market that de-risks transactions," says Andrew Sealey, a managing partner and CEO at Campbell Lutyens. "For these types of deals where there are multiple LPs in the funds, to demonstrate due process and proper advice is a hallmark that's become universal in the US and Europe, and we would envision the same in Asia."

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• Topics
• Secondaries
• Advisory
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• Asia
• professional services
• Secondaries
• NewQuest Capital Partners
• lazard
• Campbell Lutyens
• Greenhill Cogent
• UBS