Growth of a market

The explosive demand for emerging markets private equity and the subsequent fundraising growth has led to the emergence of nascent secondaries markets.

This is a natural progression, sources tell PEI. For the primary private equity markets to fully develop, a secondaries market needs to grow to give investors an escape route in case they get into liquidity trouble or if they simply want to rebalance or refocus their portfolios. This gives potential LPs more confidence in what are viewed as younger and riskier private equity markets and in turn makes them more likely to commit capital to funds.

The size of the secondaries market is a function of the primary market

Harvey Lambert

Secondaries in emerging markets is still, however, a relatively undeveloped, niche space, with only a few firms executing deals. But with the flood of capital that has gone to places like China and Brazil – country funds targeting these markets have attracted a total of $11 billion in the last 18 months, according to the Emerging Markets Private Equity Association – the amount of secondaries deals getting done in those economies will continue to grow.

“The size of the secondaries market is a function of the primary market and since fundraising in the emerging markets has grown it is natural that we’ll eventually see more secondaries deals there,” says Harvey Lambert, head of secondaries at PineBridge Investments, which spun out of AIG last year. PineBridge has done some deals in emerging markets secondaries, but thinks sellers need to rationalise their pricing expectations.

“There is still a dislocation in expectations between buyers and sellers for emerging market assets,” Lambert says. “In many instances, we have found that the sellers’ assessment of risk is unrealistic. We’ve done some deals in Eastern Europe and in Asia, and we continue to source new deals in these regions, but the expectations of risk and return need to converge more.”


The secondaries market in the US began to develop in the early 1990s, after the fledgling private equity market took off in the 1980s. It took some time for a robust secondaries market to grow up. The same progression arc is forming in the emerging markets.

For example, the bulk of emerging markets secondaries activity seems to be taking place in China and Brazil, which have well-developed primary markets.

These opportunities exist, you just have to look for them.

David de Weese

Andrew Kellett, a London-based partner at placement agent Axon Partners, has been helping to sell secondaries stakes from Asia- and Central and Eastern Europe-based funds and says the funds are a mix of local general partners and managers based in developed economies.

“There are in Asia some big US funds that have expanded there, and you do see quite a lot of activity in the early secondaries segment there, especially for US names in particular,” says Kellett.

More LPs looking to get exposure to Asia will look to pick up early, unfunded stakes as a way to increase their exposure, the source said.

Operating in emerging markets secondaries sometimes requires education on the part of the firm looking to buy assets.

Paul Capital, which has had an emerging markets secondaries practice since 2007, runs seminars “to take people through the development of the secondaries market and how it works”, David de Weese, partner with Paul Capital, tells PEI.


One vital factor in the success of sourcing and executing emerging markets secondaries is to have teams on the ground in those economies, says Bryon Sheets, also a partner at the firm. Paul Capital set up offices in Hong Kong and Sao Paulo in 2007 to get a handhold in these regions.

It’s important to get experience valuing the assets in those economies “through heightened up and down cycles, currency crises and regime changes that can go on in the emerging markets,” Sheets says. “We saw that with the trend of far more capital going into places like China, India and Brazil, we thought there was an intersection of opportunity there with capital going in, and no one to provide liquidity for an ever-growing asset class that was going to need it over time.”

Paul Capital doesn’t make a lot of its emerging markets deals public, but in 2008 the firm closed a transaction with Pegasus Capital, a private equity firm in Argentina. Paul Capital invested $45 million in a diversified portfolio managed by Pegasus that included seven operating companies.

“These opportunities exist, you just have to look for them. If we didn’t have a knowledge through our office in Sao Paulo, we wouldn’t have been in touch with the GP,” de Weese says.

Many hedge funds have been sellers of private equity assets in Latin America since the onset of the downturn. They purchased the assets at a time, during the peak of the credit cycle, when they were confident they could exit assets with 12 to 18 months. Once that exit environment began drying up, the hedge funds needed to find liquidity.

Paul Capital executed another deal in Latin America in a GP which was  concerned that a hedge fund LP, the biggest LP in its fund, was going to shut down and wouldn’t be able to meet the next capital call. Paul Capital acquired LP interests from the hedge fund, and then took over a co-investment.

Despite the opportunities in emerging markets secondaries, sources don’t believe the market will be flooded with competitors. With regulations in the developed markets forcing financial institutions to sell off private equity assets, many secondaries buyers will be kept busy.

“There’s going to be enormous secondaries opportunities globally,” says de Weese.