Secondaries Special: Emerging, slowly

Earlier this year, the International Finance Corporation, part of the World Bank, selected Greenpark Capital to run an emerging markets secondary fund; this will mostly focus on Asia, but eventually expand to frontier markets like Africa. A $100 million investment from IFC will anchor the Greenpark fund, which has a target of $500 million. So are private equity markets in some of these regions finally becoming mature enough to warrant secondary trades?

While emerging markets-related funds are still not trading heavily, some developed market institutions have been selling individual stakes in funds targeting Asian countries. China and India have been the most popular so far, sources say, including specific funds raised by western-based firms for these countries.

Opportunities remain thin on the ground. “There’s not a massive amount of deal flow,other than from Asian sellers,” one secondary fund manager says. “Most of the deal flow is in the US and Europe.” But as these emerging markets mature, a secondary market is bound to rise up as a necessary “way out” for investors who need quick paths to liquidity, he argues.

This is certainly part of the rationale behind the IFC’s move to anchor an emerging market secondary fund. It believes that establishing secondary trading in less developed economies will help primary private equity blossom in those markets. “You’re providing liquidity, and a way out,” Mark Alloway, the IFC’s head of business development for financial sector in Western Europe, told Private Equity International. “If investors know they can get out [if they have to], then they’re more likely to invest.”

Hard data on emerging markets secondary transactions is hard to come by (the Emerging Markets Private Equity Association declined to comment on how the market is evolving). But one secondary investment professional suggested to PEI that much of the secondary activity around emerging markets funds is being driven by developed-market limited partners selling out of the US and Europe, in order to build exposure to the high growth that emerging economies offer.

“There is a trend of moving assets to emerging markets, [and] more and more people are interested in using secondary deals of emerging markets funds to kick-start their programmes,” our source said.

While Asia is clearly the most promising emerging market for secondary trades at the moment, activity has also picked up in Brazil. Sellers have been offloading stakes in funds that were raised in the early part of the 2000s, according to one market source – in many cases, to free up capital so they can get exposure to more recent funds being raised in the country. LPs committed a lot of money to untested managers when the Brazil market was less “frothy” 10 years ago. That’s not a bad bet “in an inefficient market”, our source said.

“[But] now there’s suddenly lots of capital in the market, [investors] want money with managers with the ability to navigate the much more competitive landscape. They’re not trying to exit Brazil completely, they’re trying to unwind some concentration there”.

But for the likes of Greenpark, raising a fund for emerging markets secondary deals isn’t just about today’s market. It’s also about the opportunity to get a foothold in places where “the money will flow” in the future, another source said. “If you’re an LP right now and thinking about the next 20 years, what are you going to do? You’ve got to chase money into the markets that are GDP-heavy.”

Not everyone is sold on the opportunities in emerging markets secondary trades, though. One investor told PEI that the risks are still too high – and that the knowledge and resources needed to mitigate these risks makes the effort too burdensome. “There are more risks of fraud in places like China, or India,” the investor says. “If you’re based in New York and you’re following investments in China, India, Vietnam, you’re not talking the language, you don’t know the legal system… I’m not sure the risk/reward level is correct.” Greenpark will hope he’s wrong.