Secondaries: Focus on Asia

The Asian secondaries market is naturally ripening, with fewer distressed sellers and an increasing number of limited partners using it as an acceptable portfolio management tool, particularly to exit unrealised assets.

Asian secondaries account for 5-10 per-cent of the roughly $40 billion global transaction volume, a share that keeps growing as the primary funds raised in the region 10 years ago come to the end of their lives. Tail-end funds in the Asia-Pacific region numbered around 80 as of August, according to PEI’s Research & Analytics division.

“Asia’s private equity market has less depth than the US and Europe and so certain investments may be difficult to exit,” says Soichi Takata, head of private equity at Tokio Marine Asset Management, the investment advisory arm of an insurance firm in Tokyo. “Tail-end assets are more difficult to sell in Asia than in other regions and this is forcing more investors to offload such funds in the secondary market rather than waiting until the end.”

Problems in China’s public markets, coupled with delays with initial public offerings, also mean investors are looking to the secondaries market for liquidity. All this is a boon for secondaries firms, which welcome the increase in activity.

Recent secondaries transactions involving Asian LPs include Japan’s Tokio Marine & Nichido Fire Insurance’s sale of its stake in Hutton Collins Capital Partners III back to the manager, and Taipei-based Cathay Life Insurance’s sale of its stake in The Carlyle Group’s Carlyle Asia Pacific III to Amsterdam-based AlpInvest Partners.

In July, StepStone bought a $30 million stake in an Asia Pacific fund managed by Hong Kong-based Affinity Equity Partners, a buyout and growth capital firm, and the Government of Singapore Investment Corporation is reported to be planning to sell a portfolio of real estate fund interests worth around $1 billion in the third quarter of this year.

Firms have been active in raising Asia-focused funds, with dedicated secondaries funds raising $600 million in the region in 2014, according to PEI’s Research & Analytics division. There are currently five funds in market with a solely Asian focus, targeting about $811 million in total, including TR Capital, a Hong Kong secondaries firm that began raising its third secondaries fund in June targeting $250 million. Other large global secondaries players doing deals in Asia include StepStone and Blackstone Group’s Strategic Partners, which bought a stake in a $2.55 billion Carlyle Group Asia fund in March.

Firms with secondaries operations continue to grow in Asia, with US fund of funds manager Auda International and placement and advisory firm Evercore expanding their Hong Kong offices in the last year. In June, Stafford Capital Partners hired an analyst in its Sydney office to bolster its timberland secondaries capacity.


Such expansion comes amid heightened optimism for secondaries in the region. A survey by secondaries house Coller Capital published in June suggested that Asia-Pacific LPs would become the most active players in the secondaries market in the next two years.

The report, which surveyed 113 private equity investors globally, found 59 percent of LPs said they expected to buy assets in Asia and the Pacific region, with 50 percent saying they expected to sell assets there.

China and India in particular have been identified as markets in the region offering the greatest opportunities in part due to a tough exit environment in recent years.

A report published in March by Houlihan Lokey and Mergermarket said the closing of China’s A-Share IPO market had left fund managers with one fewer exit option. In India, an influx of money in the primary market aggressively chasing deals about 10 years ago, some of which ended up in poor investments, has meant GPs have had trouble finding IPO exits for their assets.

“A lot of money flew into India during 2006 and 2007, so a lot of deals were not the best deals,” says Viswanathan Parameswar, head of Swiss private equity firm Adveq’s Asia programme. “A lot of those investments have not been exited, and fund managers are under increasing pressure to exit. That of course is a primary reason for secondaries players to come in.”

Participants in the region say investing in secondaries there is not so straightforward. Local knowledge and having a local office is important if you want to take advantage of the right opportunities.

“You really need to do a lot of work on the ground to not only source your deals but to analyse them properly and close them properly,” says Frederic Azemard, a partner at Hong Kong secondaries firm TR Capital. “Deal size here is growing, volume is growing, but you need to be equipped quite well to be able to do them, and for sure you need to be local.”

Asia can present other challenges as well. A limited partner in Europe or North America who has never invested somewhere like China before may give up or have second thoughts if fund managers can’t allay their fears.

“You wind up with an investor who is more likely to sell because they lose faith,” says Justin Pollack, managing director in the private funds group at PineBridge Investments in New York, which also has offices in six Asia-Pacific locations. That might not be a reflection of the manager, but because investors lose confidence when they can’t see their investments on a regular basis, or talk to people either, he said.

The tumble in many Asian stock markets this year has given some private equity participants further evidence that traditional exit routes may be less reliable in Asia and that secondaries opportunities could fill the space. In China, the long wait time for listing on Shanghai and Shenzen’s A-Share market, as well as the opening and closing of listing windows and lock-up periods, have left LPs frustrated when returns have not come in as quickly as they had expected.

Pinal Nicum, a partner at Adams Street Partners which has offices in Beijing, Singapore and Tokyo, agrees that finding exits on the public markets is an issue. “There are still relatively few GPs across Asia that have a demonstrable record of generating exits, so this remains a key challenge to investing in the region whether through a primary or secondary,” he says.

One prominent issue in Asian secondaries is the difference in markets from one country to the next. Factors driving deal flow from the more mature Japanese and Australian markets are similar to those in Europe and North America, while China, India and Southeast Asia each have their own peculiarities.

“Exits in Australia have been pretty robust and the buoyant IPO window in 2014 has really helped,” says Dan Bowden, a partner in Sydney at Stafford Capital Partners, which invests in timberland and infrastructure secondaries.

He says drivers behind secondaries market deals in Australia include the country’s superannuation funds wanting to reduce the fees associated with holding private equity and looking to sell their stakes. High prices in other asset class markets, such as infrastructure, have also meant sellers want to transact on the secondaries market to offload assets at reasonable prices.

In Japan, financial institutions have sold fund stakes due to the regulatory environment in that country, and in India the situation is different again, with the devaluation of the currency and an influx of capital that went into the country in 2006 and 2007 resulting in sub-standard primary deals.

Still, one remaining hurdle in Asia is the stigma surrounding using the secondaries market as a liquidity tool, whether it is for fund interests or for direct secondaries. Bonnie Lo, a partner at Hong Kong direct secondaries firm NewQuest Capital Partners, says GPs’ levels of acceptance of strategically managing their portfolios or being comfortable with selling to financial buyers is still low.

“It’s a huge market and there’s not that much competition, but because there aren’t that many players, we’ve gone through and continue to go through an education process to create high levels of trust and confidence between buyers and sellers,” she says. “The market needs to change, and it is changing slowly.”