APAC GPs warm to continuation funds as buyers navigate pricing risks

Speaking at the HKVCA's Greater China PE Summit on Monday, Lexington director Niklas Risberg said buyers require discounts and strong GP alignment to get comfortable with the region's higher level of risk.

Asia-Pacific private equity managers are showing rising interest in continuation fund processes despite ongoing wariness among buyers over valuations, a conference has heard.

Speaking at the Hong Kong Venture Capital and Private Equity Association’s Greater China Private Equity Summit on Monday, Min Lin, founding partner at TPG NewQuest, said the firm has received “a lot more inbound enquiries” around secondaries transactions in the region.

“We used to need to do a lot of education to the GP managers about why [they] need to do a secondary transaction, why a continuation vehicle [and] is it a good idea,” she said. “I think a lot of GPs – in addition to thinking about asset-level solutions, selling assets or IPO-ing the companies – they are also starting to explore the continuation vehicle idea, and we continue to see interesting deal opportunities on that front.”

On a separate panel, Darren Bowdern, partner and head of asset management tax at KPMG China, noted that Asia-Pacific has seen “quite a bit of activity” starting from last year. In China, these funds are often set up as RMB structures with a different investor base coming into the continuation vehicle, he noted.

Despite this increase, Asia-Pacific markets have lagged their western counterparts when it comes to secondaries. Speaking at the HKVCA event, Niklas Risberg, a Hong Kong-based director at Lexington Partners, attributed this delayed reception to the nature of firms and investments in the region – which historically has a lower proportion of buyouts than other markets.

“If you look at the continuation fund deals in Europe and US, it’s really buyout companies, large established businesses,” he said. “When you do continuation funds on the more high-growth, maybe high-value assets, the components of the continuation vehicle are a little bit different. In Asia you’ll definitely require some discount for these deals to be able to happen, you probably need a stronger GP alignment as well than other markets just to get buyers like us comfortable with the higher risks that we see in any Asian market.”

Though discounts can make transactions more appealing, secondaries investors in the region are looking for more than just attractive entry values.

“What we’re seeing now is a much more functioning market… even if it’s an end-of-life situation, a deal is not going to happen with that fund unless there are good companies in there that secondary buyers have appetite to put into a continuation fund,” Risberg said.

“It’s not sort of a blind bucket where you can just put the slush bucket from your fund, this actually has to be quality because really, the secondary market looks to find good assets rather than buying cheap ones at a huge discount – operational performance is more important than actual price that we get in.”

The difficulty of pricing assets and negotiating valuations with sellers in continuation funds has “exaggerated in the past couple of years”, said TPG NewQuest’s Lin, noting that some sectors may still reference the high valuations of businesses seen in or before 2021.

“This is where the GPs and the original GPs and LPs will have to have a realistic look at the asset and do the re-underwrite,” she said. “If the business is still solid, it’s still growing, you look at it with a fresh set of eyes… you come to a realistic valuation as if you are investing in a new company now.”

GP-led secondaries have become an increasingly established exit path amid the scarcity of more conventional exit options. They accounted for 12 percent of sponsor-backed exit volume last year, up from 7 percent in the year before, according to BlackRock’s H1 2024 market outlook on private market secondaries.

Macquarie Group, the Australia-headquartered banking giant, is launching a secondaries advisory business in response to rising activities in the GP-led market, Secondaries Investor reported this week. Macquarie’s secondaries advisory unit will focus primarily on continuation vehicles.

Notable examples of recent continuation deals in Asia-Pacific include a $150 million three-asset continuation fund involving India’s Samara Capital and its 2014-vintage Fund II last year. The transaction, led by TR Capital, was awarded Secondaries Deal of the Year in Asia in this year’s PEI Awards.

In November, Secondaries Investor reported that Ardian and Roc Partners were co-leading a single-asset process on an Australian healthcare recruitment business owned by Sydney-based Crescent Capital Partners. The same year, industry stalwart Pacific Equity Partners exited the final asset of its 2015-vintage Fund V via the transfer of New Zealand education group UP Education to a continuation fund, per a statement. Quadrant Private Equity also reportedly completed a A$255 million ($166 million, €155 million) single-asset process in November 2022.