Coller: Hard to find ‘real discounts’ in Chinese secondaries

It’s challenging to find a real bargain in Chinese secondaries despite the steep discounts on offer, according to Coller Capital.

Secondaries buyers in the Chinese market have had the upper hand over the past year as LPs and GPs grapple with liquidity constraints and a lack of institutional interest. Schroders Capital, for example, has been seeing discounts as high as 40 percent in yuan-denominated funds, affiliate title Private Equity International reported in October.

Yet striking a sweet deal remains difficult in China, Zhan Yang, an investment principal at Coller’s Beijing office, told Secondaries Investor. While Chinese GPs have been offering attractive discounts on continuation vehicles, the underlying assets may be appraised using the most recent round of valuations – often in 2021 – because they haven’t generated revenues in subsequent years, Yang said.

“In the end, we need to do a bottom-up [analysis] and know exactly what we are buying. The discount itself doesn’t mean much in that sense,” Yang said. “We need to understand how [GPs] value the business [and whether] this valuation is reasonable before we talk about discounts.”

Even if GPs offer what Yang considers to be a “real discount”, Coller will push harder as China secondaries is a buyers’ market. GPs that were unwilling to sell assets at a discount have had a “reality check” in the past year and are now open to negotiating with secondaries buyers, according to Yang.

“It’s a good time to look at secondaries because the market is not good, people need liquidity, and GPs’ funds are expiring,” Yang said. “All these factors [lead us to] demand quite a significant discount with potential transaction parties.”

Coller opened its Beijing office in 2021 and launched a debut yuan-denominated secondaries vehicle, Secondaries RMB Fund I, last year. The fund has a 1.5-billion-yuan ($205 million; €194 million) target, according to SI’s database.

Coller will become more selective when it comes to investing in Chinese GP-led opportunities going forward, Yang noted.

“Each time we do a GP-led secondary transaction, the GP’s quality is as important as, if not more important than, the asset’s quality. The same assets work differently in the hands of different people,” he said. “As we just started our RMB transactions, we would very much like to work with high, institutional-quality GPs.”

Coller is not the only firm eyeing the Chinese secondaries market. London-based Schroders Capital has invested overseas capital in China’s domestic PE market via the Qualified Foreign Limited Partnership scheme since 2020. Hamilton Lane, meanwhile, launched a Shanghai office in February 2023 with a view to pursuing both LP-led and GP-led secondaries opportunities, PEI reported at the time.

Secondaries transaction volume in China reached 102.1 billion yuan in 2022, up 53 percent from 66.8 billion yuan in 2021, according to data compiled by Zerone, a Chinese secondaries marketplace and data platform. Activity was driven in part by the fact that many Chinese government investors were keen to exit funds that were approaching the end of their life cycles, according to a Chinese-language white paper published by Zerone in 2023.

Yang is optimistic about capital deployment opportunities in the near term. The first generation of RMB funds raised in 2014 and 2015 are about to enter the liquidation phase, he said. “That’s the reason why both LPs and GPs are looking for solutions to get out. That backdrop is one of the theses [that made us] launch the Beijing office and the RMB fund.”