Just happened

Obliterating the J-curve
Why get in on the ground floor when you can jump straight to the party happening in the loft? That appears to be at least part of why one US public pension has decided to lean on secondaries with the implementation of its private equity programme. Arkansas Public Employees Retirement System staff last week approved moves to launch into the asset class and target 5 percent exposure of its total portfolio by the end of the decade, with a whopping 75 percent of the capital going to secondaries.

Secondaries will give Arkansas PERS “a combination of relatively instantly diversified exposures across vintage, asset class and sector, no J-curve, access to a cash-flowing assets and shorter duration”, a source familiar with the pension told our colleagues at Buyouts, who reviewed materials for the pension’s meeting here (registration required).

It isn’t clear whether Arkansas PERS will commit to secondaries funds or will acquire secondhand fund stakes – the latter being easier said than done in any meaningful way, as the pension would either need to outsource buying activity or build an internal team from scratch. Still, its plan appears to be a no-brainer: either option allows the pension exposure to private equity capital that’s already invested in underlying companies, as opposed to starting from scratch with blind-pool direct funds. And with pricing for secondhand fund stakes trending at a roughly 20 percent discount to net asset value last year, according to various intermediaries’ reports, Arkansas’s move could prove a prescient one indeed.

A SEA change for Chinese PE?
China’s reopening could have implications for PE markets beyond its borders. The country’s GPs have looked further afield in recent years, with Southeast Asia a favourite destination. Some have set up shop in Singapore as a base of operations for the region, enabling them to access both a wider set of investment opportunities, as well as the pools of APAC family office capital flooding the city-state. An international focus has also been seen as an additional selling point when appealing to overseas institutions whose appetites for China might have waned.

Now that China has reopened, will these China funds pack up shop in Singapore and turn their attention back to the mainland? This is a question Side Letter posed this morning on a Southeast Asia PE webinar hosted by global law firm Morrison & Foerster.

“I think there will be a bit of that, particularly for Chinese GPs who have historically only ever focused on China and are happy to continue doing that once China starts ramping up again,” partner Steven Tran said on the webinar. “But I think many of the drivers which put Southeast Asia firmly on to investors’ radars all remain valid and relevant notwithstanding that China is now open for business again. So I think most Chinese GPs who have expanded into Southeast Asia will continue to invest in the region going forward, as an adjunct to their core China focus, but also as part of a deliberate expansion of their investment strategy beyond China.”

The bottom line: investors who’ve committed to China funds during the pandemic may find themselves with what some will see as a bonus exposure to Southeast Asia’s burgeoning PE scene, whether it be in the form of portfolio companies headquartered in the region, or Chinese assets benefiting from access to a broader international network.

So, yuan to raise a China fund?
While we’re on the subject, Warburg Pincus is seeking 3 billion yuan ($435 million; €408 million) for its debut yuan-denominated fund, according to Reuters. This latest move seems to form part of a growing trend of international firms looking to capitalise on deglobalisation and diminished appetites from some international investors for Chinese PE. Consumer PE giant L Catterton also unveiled plans last year to raise a 2 billion-yuan fund, and Hamilton Lane this month launched a debut yuan secondaries strategy via the Qualified Foreign Limited Partner scheme.

Those considering dedicated yuan funds may have to adapt to slightly different expectations from China’s domestic LPs; local funds have been known to feature different terms than their peers, such as deal-by-deal waterfalls, large GP commitments and shorter fund lives.

Essentials