Insight 2013: Asian secondaries

As LPs in Asia mature, the reasons they choose to sell will increasingly involve portfolio management, according to Jason Sambanju, managing director and co-head of Asia at Paul Capital.

What do you expect to see next year for Asian secondaries, given the limited number of large secondaries transactions in 2012?

I think it’s mostly going to be a continuation of what you’ve seen this year: larger one-off deals, and in Asia a $50 million deal is going to be quite large. What we’re seeing is chunky positions in single GPs being sold down in Asia, like a $50 million position in an India fund.

I think that’s reflective of LPs in other parts of the world becoming more wary of Asian private equity. A lot of these LPs have already done a lot of the pruning that they want in their US and European assets and they find suddenly that they have one or two big positions in Asia. An even mildly disappointing fund [has] a large chance of being sold. A lot of LPs who came into Asia had very high expectations of what private equity in Asia could generate. I wouldn’t say it’s a disappointment, but I think a lot of LPs are becoming increasingly underwhelmed. 

That’s been true for a number of years, especially in India, but I think you’re starting to see that happening in China, as well. You’re not having disasters, but you’re looking at these returns and thinking, ‘That’s not great money for the amount of risk I’m taking.’ I think people are becoming more sober in terms of their view of the China growth story, and the Asian growth story in general.

What do you expect to change in the Asian secondaries market over the next 12 months?

In the next couple of years, I think a lot of the reasons that US and European LPs sell will become increasingly the reasons that Asian LPs sell: portfolio management, unwieldy portfolio size, things like that. Asian LPs themselves are becoming more mature, in terms of their understanding of what private equity is and there are certain pockets in Asia where you are going to see that in more acute ways than others – for example, the RMB fund market.

The RMB fund market has boomed in the last five years: it’s now 50 percent of the fundraising for the total Asian private equity industry. It literally went from zero five years ago to now being half of the whole market. A lot of that money is not really private equity, but even if you discount that number by half, a lot of the money going into RMB funds has been from Chinese high net-worths and I think a lot of them don’t fully appreciate the nature of private equity funds – that when you make a commitment, it’s a commitment.

I think as you see China slowing down and these high net-worths might not be as liquid as before, they’re going to start looking at their portfolio and saying, ‘Why am I making this commitment? Why do these guys keep calling me and asking for more money? And where are the returns? I don’t see any returns.’ When the nature of making a private equity investment hits home, I think it will significantly shift the amount of deal volume for us. But I don’t think it’s a 12-month thing, because this is a mentality shift.