Why hasn't the secondary market taken off in Asia?
There’s been so much money deployed in Asia, but if you look there’s been very little exits. The IPO markets are topsy-turvy or closed, and the trade sale markets are fairly underdeveloped. So we felt that there’s a need for an alternative liquidity path to provide some relief. But we [also] realised [that] the main buyers out there – the primary private equity guys – really aren’t set up to buy secondary assets. Because [in our experience] one of the first things they said was ‘We want to meet the company.’ And we would say, ‘Wait a minute, you can’t meet the company yet, because we don’t know if you’re a real buyer or not – I need to understand if you are serious.’ Primary guys often don’t think that way – they spend 250 hours with the management team before investing, whereas in a direct secondary deal, you don’t typically get access to the management until the very end of the process, and you may only get 20 hours with the management. So we ended up recognising that there really aren’t many buyers in the market that understand how to interact with a counterparty who is a financial investor. So we felt that’s the niche [for us].
When NewQuest spun out of Bank of America in 2011, what was the biggest challenge?
When you’re not part of a large institution, you lose the infrastructure, and you lose the brand name – and then you have to rebuild all that. [Inside the bank] we had a business with 21 assets, and with management we drew the support of another 30 to 40 people. Then the next day, we were out on the street with nothing, [but we had] the same 21 assets [to manage]. We didn’t even have an office, not even an IT guy. So we needed to rebuild our brand and infrastructure and obviously that takes time. This is kind of silly, but you even have to rebuild your internal procedures on expenses and policies, everything from vacation to confidentiality. The other part [of independence] is that we were really able to go into more long-term planning – I think it’s very hard to plan long-term in a bank because things are changing so rapidly. Whereas here, you have a fund and your own business, so that affords you the luxury of asking, ‘where do we want to be five years from now?’
ESG is one of the core areas you focus on. Is it more difficult to drive those values in a portfolio company as a secondary investor?
As a broad measure in Asia, I don’t think people are 100 percent convinced [that they need ESG]. Part of the problem is a lot of the underlying companies are struggling with basic necessities. Do they have electricity all the time? Do they have access to the raw materials they need? It’s a bit challenging for our model since we’re not giving any new money to the company. If you’re a primary investor, you can entice them with new capital – ‘I’ll give you $30 million, however, I want you to fix this, this, and this.’ When we step into the shoes of the other investor, if those rights aren’t already there, then we kind of have to use Jedi mind tricks to convince them to do things that we think are proper. For example, one of our companies is in the electronics component space, similar to Foxconn. We visit their manufacturing facilities and try to talk to them about addressing ESG issues. And luckily, Apple [their key customer] is also pushing them on ESG. But if we were the lone voice, we would have to make our case even more strongly because we didn’t have any ESG rights [when we took over the company].