A year ago, secondaries firms in Asia were pretty gloomy about dealflow in the Asia-Pacific region. Despite the perfect storm apparently on the horizon in countries like China and India, frothy pricing and performance issues were preventing deals from being done.
However, this frustration doesn’t seem to have deterred secondaries firms from looking to strengthen their teams in Asia: a steady flow of professionals have appeared in the region over the last 12 months.
In September last year, Cogent Partners moved Dominik Woessner from London to the firm’s Asia office in Shanghai, in order to bolster its secondaries team. In November, Michael Camacho joined AlpInvest Partners’ Hong Kong office to lead its secondaries efforts in the region.
Most recently, Jason Sambanju, previously a casualty of the demise of global secondaries firm Paul Capital (which in March said it would wind down its operations after a planned sale to Hamilton Lane collapsed), resurfaced as head of Asia secondaries at Deutsche Asset and Wealth Management – a newly created position at the firm.
Like others, DeAWM is strengthening its hand in the region in the belief that opportunities are abundant.
Why? Frankly, secondaries firms are bullish about the opportunity precisely because Asia’s private equity markets have not delivered the returns LPs had expected.
“A lot of money went in the ground in Asia and not a lot of money came back – so I think this is a good time to go and provide liquidity solutions as a secondaries [investor],” Carlo Pirzio-Biroli, head of private equity at DeAWM, explains.
As a result, LPs have been looking to exit their positions in private equity funds – particularly in China and India – forcing GPs to restructure their already expiring vehicles.
Generally, industry sources believe, it is LPs that are driving the fund restructuring opportunities coming out of these markets – either because of a shift in strategy, the length of time they’ve been invested in a fund, or dissatisfaction with the returns they’ve seen.
“It will depend on where the investments are in their life-cycle, and it will depend in large part on the existing relationship between the GP and LP,” Sambanju suggests.
But some take a harder stance on Asia’s performance – both at a micro and macro level.
Steve Costabile, managing director and global head of private funds at PineBridge Investments, suggests that what we’re seeing is “a combination of disappointment in the GP and disappointment in the macro”. India and China’s current macroeconomic environments have caused investors to reassess their exposure to the region, he argues.
“At some point after you’ve been invested for 10 to 12 years, even if there is near-term liquidity that could happen in two or three years, it is ultimately not going to change your IRR at this point. So [LPs] say to themselves: ‘If I can get liquidity now at a somewhat reasonable price, I am better off re-allocating that now’.”
BUMPS IN THE ROAD
However, it’s still challenging to find the right deals, particularly in emerging economies like China and India.
“The Asian secondaries market continues to grow [and] we do see dealflow in the region picking up – it is just a matter of being able to pick and choose the right deals,” Sambanju says. “One of the key challenges is transparency, particularly when you are looking at a GP or fund restructuring deal where [there is] a smaller group of assets – so 10 to 20, rather than 100 if you were looking at a broad LP package. Then you really want to make sure you get your diligence right.”
Moreover, in heavily regulated markets like China and India, foreign ownership restrictions can impede dealflow. This needs to be considered very carefully when identifying good opportunities.
“You want to make sure you have as much control offshore in terms of your being an investor in the asset, and you need to really have an understanding of how these sorts of structural nuances work,” adds Sambanju.
When less experienced investors play in Asian markets, that can also complicate the process. While the LP base of Asian funds tends to be similar to those in Europe, some countries, notably India, have local investors to contend with – and this changes the dynamics of the secondaries market.
“In India, you have domestic investors [like] Indian banks, insurance companies or high net-worths and these are LPs that don’t have as much experience dealing with private equity funds as the US pensions or European corporates or pensions. So in that case, you are approaching the fund and LPs – and there can be a process of education required to help the LPs understand the intent of the restructuring and what they stand to gain from it,” Sambanju says.
Pricing has also been a major constraint on dealflow in recent times: firms have been holding back from the market because of unreasonably high valuations.
However, this situation is starting to change, PineBridge’s Costabile believes.
“We generally do see traditional, wider discounts to prevailing NAV for Asian opportunities in the secondaries market than [we see in] developed markets,” he says.
While the quality of managers in emerging Asia has also been raised as a key sticking point for deals in the past, Costabile notes that this can actually have a positive impact in terms of the price of these transactions.
“Many of them are not institutional quality managers. That doesn’t mean they don’t have good quality assets in their portfolios, but it does make the due diligence and underwriting that much harder. And as that becomes harder, the price secondaries players are willing to pay goes down. So for us, if we can underwrite the risk, we are willing to look at the assets – [because since] there aren’t a lot of bidders and it is hard to do the work, we should be rewarded with bigger discounts.”
However, this isn’t necessarily true across the board; some industry players remain sceptical about valuations in Asia.
“Chinese valuations can be even higher than Indian valuations – [i.e.] unrealistic,” says Tim Flower, managing director at HarbourVest Partners. “It is unhelpful when the NAV is calculated with a glass-half-full mentality, and finding a price at which the buyer and seller can work together is harder.”
He believes the situation is about the same as it was 12 to 18 months ago, with the election of Narendra Modi in India fuelling optimism about the economy and exacerbating an already difficult bargaining position for firms.
That’s not to say deals aren’t out there; HarbourVest itself is currently assessing a few opportunities. But Flower isn’t confident that secondaries players are paying the right prices.
“Pricing has not made deals any easier – not more difficult, necessarily, but not easier,” he says. “There have been traditional LP deals, for managers that I would not even say are second quartile, that are going for prices that I think are ridiculous. So there are a few secondary buyers that are a little bit desperate for LP deals, buying at prices I do not think are justified.”
Still, he adds, what has changed is people’s willingness to consider secondaries as a solution to their problems.
“People are now aware of restructurings – the fact that they can be positive for everybody – and we are seeing more restructuring discussions going on. We are certainly reviewing more restructurings than we were in 2013.”