Secondary exits: Pass the parcel

Baring Private Equity Asia finished 2015 with a flourish, acquiring China's HCP Packaging for $775 million and agreeing to buy Singapore-based precision engineering business Interplex Holdings for $320 million. In both cases, the sellers are other GPs - TPG Capital in the case of HCP, and CVC Capital Partners and Standard Chartered Private Equity in the case of Interplex.

Of the close to a dozen control deals Baring has disclosed since the start of 2013, eight have facilitated exits for existing private equity investors, including Vistra Group and CMS Info Systems, also from last year. A further two transactions have seen Baring-owned companies buy assets from other investors.

This is unusually high for an Asian pan-regional fund, but does it point to a broader trend? Generally speaking, there has been a gradual increase in private equity secondary exits in Asia, with $9.3 billion recorded for 2015 compared to $6.2 billion in 2010. The exception is 2012, which featured a couple of very large sales of minority stakes in companies - for example, Temasek Holdings paid $2.3 billion for Goldman Sachs' 1% stake in Industrial and Commercial Bank of China.

For buyouts alone, 2012 still represented a record high, with $4.9 billion transacted compared to $2.7 billion in 2015. This reflects the way that sizeable individual deals can really move the needle in Asia's nascent private equity market. Last year's outlier was MBK Partners' - announced but not yet closed - sale of China Network Systems to Morgan Stanley PE Asia and Far EasTone Telecommunications for $2.3 billion.

Speaking to AVCJ late last year, Jean Eric Salata, CEO at Baring, said the blossoming of secondary exits is a natural evolution for the industry in Asia. "It's the majority of the market in Europe and it's proven to be a very successful strategy generally," he said.

It is also worth noting that secondary buyouts fall into two categories: acquisitions of companies that are wholly-owned by other PE investors; and deals that see control transfer from a founder to a private equity firm, with existing minority investors exiting at the same time. This was the case with Baring's acquisition of India-based Hexaware Technologies, and more such deals may follow as PE investors persuade founders to exit alongside them if the preferred IPO route remains out of reach.

An argument could also be made that Asia's rapid growth will see more companies change hands as they achieve a scale and sophistication that requires a different kind of private equity investor. Bushu Pharmaceuticals, which Baring bought from Tokio Marine Capital in late 2014, would fall into this category.

Nevertheless, as has proved to be the case in Europe, secondary buyouts inevitably attract increased scrutiny - LPs are sensitive to the reasoning and pricing of any deal that involves a transfer of control from one PE firm to another. This doesn't have to be a problem for private equity firms, provided they deliver the desired performance.

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• Topics
• Buyouts
• Exits
• Exit
• Trade sale
• buyout
• Baring Private Equity Asia