Fund focus: HQ prepares for Asia secondary surge

Commitments to global secondary funds reached a record high of $43 billion in 2017 and Preqin estimates there is close to $90 billion of capital sitting on the sidelines waiting to be deployed. Managers are routinely exceeding their fundraising targets, from secondary specialists to multi-strategy houses that offer a combination of primary, secondary and co-investment exposure. But in the latter category, only one group has a dedicated Asia vehicle.

HQ Capital closed its latest Asia secondary fund last week at the hard cap of $250 million, having set out to raise $200 million. In addition to receiving support from LPs that are invested in HQ’s global secondary platform, the fund attracted a variety of new backers. Some of these LPs have generic secondaries exposure, but they were sold on the specifics of the Asian opportunity set.

“Everybody believes that the maturing of the secondary market in Asia is an inevitability; the question everyone has is when. We are making a call that now is the time. Given the volume of opportunities coming out of this part of the world, the supply-demand imbalance in favor of experienced buyers, and our capabilities, we believe it’s the right time to have a dedicated Asia vehicle,” says Lucian Wu, a managing director at HQ.

The notion of a supply-demand imbalance is based on a recognition that many funds across Asia, although primarily in China and India, are nearing the end of their lifespan. Some GPs are looking to return capital to LPs with a view to launching a new fund; others are in wind down mode. One way or another, the emphasis is on generating liquidity, whether that means LPs exiting their positions in funds, GPs selling off portfolios of direct positions in companies, or wholesale fund restructurings.

The challenges for secondary investors seeking to capitalize on these trends are size and access. On one hand, they must be flexible enough to pursue deals that by North American standards might be considered sub-scale. On the other, in a region that lacks strong intermediation, they require networks large enough that when opportunities arise, they know where to find them.

“With a double-digit global secondary fund that has Asia as a pocket, there are always questions about economies of scale. There have been LP commitments in Asia of $75-100 million per fund, but in our view that is not the mainstream,” Wu explains. “We see more opportunities in the $15-25 million transaction size range.”

As for deal access, he observes that three-quarters of the secondary deals HQ has sourced in Asia have come from sellers based outside the region. This points to the fact that the longstanding investors in Asian PE – who are generally more willing to trade pieces of their mature portfolios – come from North America and Europe. “You need a presence outside of Asia to access those sellers or you are missing out on the bulk of that universe,” Wu adds.   

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• Topics
• Secondaries
• Fundraising
• HQ Capital
• Asia
• Secondaries