Asia is fertile ground for direct secondaries

Many companies in Asia are still run by first-generation families and investors may find it easier to exit through direct secondaries deals, according to a Hong Kong firm.

Asian direct secondaries provide attractive exit opportunities for investors, as volatile exit routes in the stock market and stigmas against secondaries buyouts leave them seeking alternative ways to find liquidity, according to a partner at Hong Kong-based direct secondaries firm.

Bonnie Lo, a partner at NewQuest Capital Partners, said financial buyers acquiring minority stakes in local firms was becoming a more accepted exit route for investors.

“A lot of the companies in Asia and China particularly are still run by first-generation entrepreneurs and all the stars need to align for the company to be in a good position for an mergers and acquisitions target,” Lo told Secondaries Investor.

The over-reliance on initial public offerings in Asia also meant investors have been frustrated when markets such as China’s Shanghai and Shenzhen stock exchanges were shut to public listings. This opened the doors to deals such as direct secondaries, where a buyer purchase a portfolio of minority interests in multiple companies.

“Asia, given that most of the deals are minority deals and run by first-generation founders, is a more suitable market for secondary transactions or selling to a financial buyer,” Lo said. “It means that as a buyer, I just buy the minority investment and take it over from the existing GP and continue to work with the founder who’s running the show.”

Asian secondaries, including direct secondaries, account for 5 to 10 percent of the roughly $40 billion global transaction volume, according to industry participants.