Looking forward: Asia-Pacific in 2016

Greater dealflow will come from Australian superfunds and Japanese pension funds, but pricing may also widen.

This year saw increased activity in Asia-Pacific with secondaries firms opening new offices and the launch of at least two dedicated Asia-focused secondaries funds.

Here are five predictions from market participants on what is in store for the secondaries market in Asia Pacific next year:

1. Australian superfunds will return as sellers

Australia’s superannuation funds were quite active in selling portfolios about two years ago, and they are likely to return as sellers next year, according to Michael Belsley, a partner at law firm Kirkland & Ellis in Chicago who works on Asia-Pacific secondaries.

“Given the recent weakness of the Australian dollar, you may see the superannuation funds returning to the secondary marketplace as sellers in 2016,” Belsley said. “Australia will continue to be a source of deal flow because of the maturity of the private equity market in Australia.  Institutional investors there hold mature assets, and they may be interested in exploring liquidity opportunities rather than just waiting for the assets to generate cash flows.”

2. Falling energy prices will spur energy secondaries

Market participants speak of rising interest in energy-related deals, much of which will be fund restructurings for vehicles that made bad bets in the sector or were affected by drops in falling oil and gas prices. This will be particularly pronounced in Asia and emerging markets, said Takao Akaogi, managing partner at Ant Capital Partners in Tokyo.

“Assets related to energy industries and assets from investors who incurred losses related to energy will start to be disposed of,” Akaogi says.

Making gains from energy secondaries won’t be easy though, with timing a key issue and much of it depending on whether energy prices bottom out and stabilise.

3. Pricing will widen as more sellers come to market

Greater dealflow will encourage more sellers to come to market, according to Charles Wan, a vice president at Hong Kong-based placement agent Atlantic Pacific Capital. This will cause bid/ask spreads to widen, leading to a drop in quality as sellers try to take advantage of a more liquid market.

“There are more sellers in Asia, the Australian Superannuations have been selling and the Japanese banks have been selling,” said Wan. “LPs are looking at their portfolios and thinking, we’re not going to be long on these positions, we’re going to parse out some of these names. That’s going to lead to better flow next year, leading to wider bid/ask spreads,” he said.

4. In Japan, pension funds will provide dealflow

Japan’s government will continue efforts to dissolve some of the country’s 500-odd industry and regional pension funds, which have suffered from scandals and incidents involving deception by asset management firms, according to Akaogi.

“The asset liquidation accompanying the break up of [such] pension funds will continue in Japan’s secondaries market,” he said. About 1 percent of public welfare pension funds’ 18 trillion yen is invested in private equity.

5. Asia private equity 3.0 is upon us

As the Asian private equity market is maturing and entering its third cycle, investors there are feeling more comfortable using the secondaries market to transact investments done since the global financial crisis.

“We’re coming up on Asia private equity cycle 3.0,” said Wan. Private equity investments can be divided into two cycles: pre-global financial crisis and post-global financial crisis, and limited partners in Asia are approaching the end of their post-global financial crisis investments, Wan said. With a third cycle of investments beginning, LPs are becoming more confident about which existing assets they can dispose of, and this will drive dealflow.

“There is more maturity in the market now,” he said.