Will Asian secondaries boom at last?

The continent looks like it is fulfilling its long-held promise; the question is whether the breakthrough will last.

“This will be a breakthrough year for Asia.” These words have adorned the covers of business magazines for years about any industry you can name. Sometimes the prediction was right, but not most of the time.

In December, in one of a series of articles looking forward to 2018, sister publication Secondaries Investor struck a cautious tone. Dealmaking in Asia would remain lumpy, it said, accounting for $3 billion-$5 billion of global secondaries volumes – around 10 percent of the global total and more or less in line with the recent average. There would be more GP-led processes but, due to a lack of suitable candidates, not many more.

Now, well into the third quarter, it looks as if the predictions may have been too conservative. In July Singapore’s Government Investment Corporation offloaded around $1.7 billion of private equity stakes to Goldman Sachs Asset Management, while Australian superannuation fund Commonwealth Superannuation Corporation sold $900 million worth.

Asia is the theatre for a number of large, brand-name GP-led deals. In July TPG was revealed to be mulling GP-led processes on its 2008-vintage TPG Asia Partners V and the 2013-vintage Asia Partners VI – funds that raised a combined $7.4 billion. It is expected the eventual buyer will also make a stapled commitment to a seventh Asia fund, which is in market and seeking $4 billion. Days later it emerged L Catterton was looking for a way to give the assets in its 2009-vintage, $637 million L Capital Asia fund more time.

And it’s not just the big names. The region has been the site of several small but interesting deals, such as the yuan-to-dollar restructuring of a fund full of unicorns managed by Loyal Valley Capital and the spin out of Aretex, the private equity business of Chinese investment firm ZZ Capital.

Advisor Greenhill Cogent, in its half-year report, noted that secondaries transaction volumes of Asian-focused funds nearly doubled during the first half compared with full-year 2017, accounting for 14 percent of the global total.

Lumps and bumps

Are these deals indicative of a breakthrough in the Asian secondaries market or just another couple of ‘lumps’?

Tim Brody, a managing director with investment firm HQ Capital, thinks the former. He told us in June that the ability of firms to generate exits – the lack of which held Asian secondaries back – is improving as the number of strategic buyers in the region grows and stock markets become more accessible.

“The portfolio we’ve built so far has already generated meaningful distributions-to-paid-in, despite being on average only about a year old,” he said, discussing its recently closed $250 million Auda Asia Secondary Fund.

On the other hand, perhaps the market has not turned a corner; instead, a confluence of forces – the huge amounts of dry powder pushing buyers down the risk curve, a better match in pricing expectations between buyers and sellers, and the success of the Warburg Pincus strip sale last year – have prompted a clutch of big deals. Has there been a meaningful structural change? “No,” says one secondaries-focused Hong Kong-based lawyer, firmly.

Mostly likely the truth is a combination of these two views; a maturing market complemented by favourable conditions. Either way, it looks promising.