Secondaries supply-demand mismatch most extreme in Asia - AVCJ Forum

“Looking at GP-led deals across Asia, on average we were talking about $2 billion a year. In the past 12 months, we have seen $15 billion in the market. Some of those are completed and some are still in process. That gives us options to select and work on deals we really want to do,” Alex Shum, a managing director at NewQuest Capital Partners, told the AVCJ Private Equity & Venture Forum.

Nevertheless, investors are more risk-averse in Asia compared to developed markets, with a lower level of maturity within the GP community, asset price volatility, and currency volatility among the considerations. In this sense, wider choice can undermine deal certainty.

“Some of the activity we have seen in Asia has caused us to be thoughtful in terms of which portfolios we want to lean in and be more aggressive in pursuing versus those that may have a risk profile that either adds to the fundamental risk of the underlying assets or contributes to the execution risk associated with the opportunity,” said Jeff Keay, a managing director at HarbourVest Partners.

Keay acknowledged that the demand-supply mismatch “is even more pronounced in Asia” than globally, but he noted that the ability to be selective can lead to longer syndication processes and a need for more syndicate participants to round out capital bases.

An increasing amount of deal flow comes from Chinese managers interested in cross-currency deals that allow them to leverage track records in the renminbi-denominated space to launch US dollar funds. NewQuest recently helped Ameba Capital do this, financing the acquisition of several software companies from an older local currency vehicle that were used to seed a new US dollar fund.

“Historically speaking, private equity capital raising in renminbi has far exceeded US dollars in China. These renminbi funds tend to have a much shorter tenor, five or seven years,” Shum said.

“We are seeing a lot of these funds maturing and renminbi LPs are asking for distributions. More than 50% of China deals have been exited through IPO, but the markets are on and off. Recently, exits have been a headache for many managers. This has created a large pool of un-exited assets.”

While rising activity in China can be linked to a greater awareness of secondaries – 10 years ago, NewQuest would explain how these deals work; now managers call up and say they want to do a secondary – a surge in GP-led transactions globally is the result of reduced stigmatization. Secondaries are seen as a liquidity tool for all managers, not purely a way to address trouble-hit funds and firms.

Yann Robard, a managing partner at Whitehorse Liquidity Partners, noted that GP-led volume would likely reach $50 billion in 2021 alone, having totaled $100 billion over the previous five years. This activity is expected to propel overall secondaries volume to $100 billion in 2021, a tenfold increase from 10 years ago, and Robard projects the market will reach $1 trillion by 2030.

“Break it down in terms of what that means from a private capital perspective, it’s very small. Private capital has grown from $5 trillion globally in 2016 to $10 trillion in 2020. It has doubled in size, with an annual growth rate of 18%. Cut that growth rate to 10%, just to be conservative, that gets you to $16 trillion by 2025 and $25 trillion by 2030,” he said.

“This year we are talking about the secondary market breaching $100 billion for the first time. But the secondary market is trading on 1% of the $10 trillion out there today. If that 1% grows to 4% over the next 10 years, 4% of $25 trillion is $1 trillion of annual secondary market volume.”

Growth in the GP-led space was cited as one factor contributing to the rise from 1% to 4%. Others include LPs being more active in how they manage their portfolios; the GP stakes market blurring with the secondaries market; more capital from constituencies that tend to value liquidity, such as retail investors and high net worth individuals; and a general maturation of different private asset classes.

“GP-led transactions, regardless of what form they take, are a new permanent part of the private equity landscape,” Keay added.

There are still risks, notably in Asia where certain types of secondary transaction are more nascent. Single-asset deals are a case in point. The appeal is obvious – managers get to roll over prize assets in anticipation of bigger paydays to come and LPs can choose to stay for the ride or exit their positions.

However, these deals are also hotbeds of potential conflicts over pricing and terms, given LPs are either staying or going, while the GP has a clear interest in making deals happen. Selling LPs, therefore, closely scrutinize the rationale behind a transaction and the execution process, asking whether it is transparent and conducted at arm’s length.

“A few badly run deals would be quite detrimental,” said Arjun Bawa, a partner and head of Asia at Fairview Capital Group. “As an advisor in Asia, our clients want a similar level of execution and high standards they have seen in deals globally. It is imperative for us to hold to those standards, make sure we check every box in everyone’s ILPA guidelines.”

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• Topics
• Greater China
• Exits
• Secondaries
• China
• NewQuest Capital Partners
• HarbourVest Partners
• Fairview Capital Group
• Whitehorse Liquidity Partners
• Secondaries
• AVCJ Events