PEI Asia Forum: Secondary growth will be slow(2)

Asia's secondaries market will continue slow, incremental growth simply because the region's private equity market is not yet mature, delegates heard at the PEI Asia Forum in Hong Kong.

Estimates have placed the Asian secondaries market last year between $1 billion to $1.3 billion, according to Stephen Sloan, co-founder & managing partner of Cogent Partners. The figure is only 3 to 4 percent of the global secondaries market.

Any growth of secondaries has been modest, and the amount of dry powder available in Asia will likely keep it that way, added Doug Coulter, partner at LGT Capital Partners.

“Even now, most LPs we talk to are looking to add to Asia, not sell their Asia assets,” Coulter said on the panel.

Offsetting that is lack of liquidity, as fund managers in China and India continue to hold investments due to weak public markets. There is rising pressure on GPs from LPs to begin showing some returns, according to Darren Massara, managing partner at NewQuest Capital Partners.

Massara estimates that on average, $40 billion a year has been invested in Asia private equity, as compared to only $10 billion a year realised in exits. With the investment capital accumulating, ultimately LPs will have to make some kind of exit decision.

However, Coulter also pointed out that the bulk of Asia capital was raised in the 2006 to 2007 vintage period. As such, some GPs still have another few years to divest their funds.

What will really drive the secondary market, according to Macquarie Funds Group head of Asian private equity Hugh Dyus, is a broader and deeper disillusionment with the region's key markets. Many LPs first invested in Asia with unrealistic expectations – every GP promised a 20 percent IRR and at least a 2x return, he said on the panel. But the performance of these GPs has rarely matched the promise.

“Maybe you can say private equity is outperforming the public markets, but compared to original expectations, the performance always disappoints,” Dyus said.

However, the real push may not come for another few years, Dyus told Private Equity International, because it often takes investors a few years to start selling off assets after the bad news hits, he said. In Asia, the majority of secondary market growth will probably come from single company sales, rather than sales of an entire portfolio, because then it is easier to pick companies that the buyer likes.