Careful consideration

Discounted secondary positions are up for grabs in Asian funds but regional LPs still remain hesitant buyers, writes Siddharth Poddar.

Many LPs who have committed to Asian funds in the recent past are accustomed to quick and strong returns that were in sync with the region’s economic boom. A few of them have been left bewildered by slowed realisations and distributions that have plagued private equity programmes during the global financial downturn, and now want to liquidate some of their fund interests or shake up their strategy.

While selling of LP interests in the secondary market is not a new phenomenon in Asia, it is becoming increasingly popular. Most funds on sale are focused either on Greater China or India. A number of institutional investors committed large sums of capital to these markets when valuations were on the up and as one industry professional said, “every manager looked good”.

But while sellers are increasing, there still aren’t too many Asian buyers for these assets. Asian LPs say they are interested in the offers being made, but most admit that they aren’t buying anything just yet. In a market that is only just beginning to take root in Asia, pricing of secondary assets is a tiresome process requiring expertise – something that most Asian LPs, who are relatively new to the asset class, lack.

LPs are reporting that secondary positions in Asian funds are as heavily discounted as 30 percent to 40 percent in some cases, with an average discount of between 20 percent to 25 percent. Once third and fourth quarter financial statements of portfolio companies are out, these discounts are likely to be larger.

Still, some LPs say that for the moment, they will only acquire secondary stakes in funds that they have already made primary commitments to, noting that discounts are not sufficient justification for a move from primary to secondary transactions.
Over time, this mindset is sure to change as it has in more mature private equity markets. In the meantime, secondary and fund of funds managers are set to sweep up stakes with notable managers at significant discounts.