Asia secondaries challenged by valuation complications

Darren Massara, managing partner at direct secondaries specialist NewQuest Capital Partners, told the Hong Kong Venture Capital & Private Equity Association’s (HKVCA) Asia Forum that he increasingly sees opportunities involving consumer, healthcare and financial services assets. The geographies of primary interest remain the same – Greater China, India and Southeast Asia – but the emergence of new economy investments can complicate the assessment process.

“Broadly speaking, you have offline businesses and online businesses. Online businesses are growing very rapidly but the challenge is trying to evaluate investments in that narrow offline and online space. A company could be a market leader with $500 million in revenue but it is burning through $50-100 million in cash every month,” Massara said.

The objective of the secondaries investor is to acquire positions in more mature companies at later stages so that it can deliver liquidity to LPs earlier, helping to ameliorate the j-curve effect in institutional investors’ portfolios. The question for assets in industries that are still nascent or susceptible to disruption is whether they fit the secondaries profile.

Several GP restructurings have been completed in India over the last couple of years involving venture capital portfolios and investors say they see more opportunities along similar lines. However, it is difficult to get comfortable with valuations – whether considering a direct secondary transaction or a traditional LP position in a VC fund – because they are often marked up based on a combination of later rounds for particular companies and general euphoria.

“So many of these Indian portfolios have Flipkart, Ola or Snapdeal and you just don’t know where to start from a valuation perspective,” another investor told AVCJ, speaking on the sidelines of the Forum. Mutual funds such as Morgan Stanley and T. Rowe Price have marked down their holdings in online marketplace Flipkart and ride-hailing app Ola several times over the past year. SoftBank has also revised downwards its valuations for Ola and Snapdeal.

Nevertheless, the broader secondaries opportunity remains largely unchanged. Massara noted for every $4 of primary capital deployed in Asia over the last 10 years, only $1 has been returned to LPs. The picture is equally bleak when viewed in the context of the number of new deals versus the number of exits. In the US and Europe, the new investment-exit ratio over the past decade has been 2:1. In China, it was 4:1 in 2012, 15:1 in 2015 and 25:1 in 2016, he said, citing PwC for the latter figure.

The reasons for this dynamic are well-established: the dominance of minority growth transactions in emerging Asia means GPs have limited bargaining power and an IPO is often the only exit option; meanwhile, capital markets are prone to volatility, and sales to trade buyers and other private equity firms are still relatively nascent. Deals also fail to transact because the selling GP got in at a high valuation and wants to secure a positive return, even though this may no longer be realistic.

“You get updates from GPs about what is going to happen in their portfolios and nine times out of 10 they say the exit path is an IPO, and you know that if it’s 12-24 months that is unrealistic,” said Tim Flower, managing director at HarbourVest Partners. “Other GPs, when it’s 12-24 months out, they think about how to get this to some kind of secondary or strategic exit.”

However, he remains confident that deal flow will pick up from these sellers because of the “10-year trigger” – funds are approaching the end of their lives and LPs would rather force exits than receive distributions in specie.

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• Topics
• Secondaries
• Greater China
• South Asia
• Southeast Asia
• China
• India
• NewQuest Capital Partners
• HarbourVest Partners
• HKVCA
• Asia