Demand from APAC managers for secondaries on the up

Secondaries buyers are taking a cautious approach to investing in the Asia-Pacific region, even though a wealth of opportunities are available to be tapped.

APAC asset activity – defined as any LP selling APAC positions, or an APAC GP-led – reached $6 billion in 2022, down from $7 billion in 2021, according to a report from Greenhill. Meanwhile, APAC seller volume – APAC-based LPs selling any positions, APAC GP-leds, or an APAC-based asset management company sale or spin-out – reached $8.5 billion, down from $11 billion in 2021.

2022 was a “particularly challenging year” for APAC private equity, and the secondaries market was no exception, Darren Massara, managing partner of TPG’s NewQuest Capital Partners, says. In particular,  it was “really hard to get anything done” in the second half of the year given the wide bid-ask spread.

Buyers were averse to backing unprofitable growth and venture capital countries in APAC last year, according to Dominic Goh, a managing director at HarbourVest who is based in
Singapore.

There was some risk aversion with regards to emerging APAC geographies, with buyers becoming very cautious about China deployment. Transactions also took a lot longer to complete as negotiations lengthened and due diligence became more thorough – particularly for global capital that could be invested elsewhere, Goh adds. He expects all of these trends to continue throughout this year.

On the flip side, the three buyers say they expect more interesting opportunities to come out of the woodwork.

Demand for GP-leds “was at the highest level I have ever seen” last year, Massara says. He adds that TPG NewQuest saw more than $20 billion of demand for continuation vehicle liquidity solutions in its pipeline, even though only a small percentage of those proposed vehicles actually closed. “This year, we’re starting to see bid-ask spreads narrow to a point where we believe transactions will start to
close again.”

Paul Robine, founder and chief executive of TR Capital, is particularly bullish, predicting a record year for APAC secondaries activity in 2023. He sees two main areas of opportunity: the structural opportunity that stems from the unrealised value of private equity-held assets that are at least six years old, the value of which Robine pegs at $1 trillion as of year-end 2022; and the cyclical opportunity, where sellers are coming to the secondaries market as a way of exiting assets during periods of volatility,
he explains.

In 2023, transactions will need a lot of downside protection in order to get done, Goh says; he expects to see structural solutions like preferred equity being used. Interesting opportunities will come out of the woodwork, and buyers “will need to turn to such types of structuring to get deals done”.

GP-leds proliferate

A number of sizeable GP-led single asset transactions closed in 2022. Coller Capital, for example, co-led on a $1.5 billion single-asset continuation fund deal in the region alongside Korean fund manager Hahn & Company. Meanwhile, following a strategic sale of half of its stake, Australia-based Pacific Equity Partners rolled its stake in smart metering business Intellihub into an A$1.5 billion ($1 billion; €950 million) single-asset continuation fund. Hosen Capital and Quadrant Private Equity also closed on single-asset continuation funds during the year.

Shane Gong, head of Evercore’s Asia-Pacific private capital advisory team, says last year’s single-asset transactions were driven by good managers with a well-performing asset that the GP wants to manage and drive value in for a longer period of time. This falls in line with the themes that have driven similar transactions in Europe and North America.

The size of GP-led continuation fund transactions in APAC is also increasing, approaching the same size of the deals seen in North America and Europe, Massara says. For example, HarbourVest, TPG NewQuest and Committed Advisors co-led on a $700 million continuation fund deal involving assets from funds managed by Capital Square Partners and Basil Technology Partners.

TPG NewQuest continued to see new opportunities in the $500 million to $1 billion range in the first quarter, Massara says. “Demand from GPs remains strong and transaction sizes are now much more meaningful – so, structurally, that’s the direction we believe the market will continue to head in.”

In for the long haul

GP-led continuation funds are “definitely here to stay” in APAC, Massara says. “They’re becoming more bespoke, more innovative and sizeable, which will inevitably attract more supply from GPs and increased appetite from the buy-side as well.”

The bar is high for Asian single assets in the current environment, because global single-asset supply has increased and global buyer preference has shifted toward diversified portfolios, Gong says.

He adds that he believes investor demand is strongest for GPs that possess a strong track record and a multi-asset portfolio. There will still be demand for good single assets, but smaller deals will be more executable in the
current market.

Greenhill is taking a careful approach to geography and sector when it comes to the mandates it takes on. The firm wants to see “true economic moats around the underlying asset or assets”, Lloyd Bradbury, head of the investment bank’s Asia-Pacific capital advisory team, says. Crucially, it wants managers that really want to re-invest and align with their investors. GPs also need to be flexible to get transactions over the line. “Often, it takes time,” Bradbury adds.

LPs come to market

There are some “very sizeable” fund books from investors in APAC selling global portfolios, HarbourVest’s Goh says. However, the firm has seen fewer

fund positions in APAC managers, which he believes has to do with the fact that US and European managers are easier to price “and, frankly, [are] better priced”. Sellers will therefore prioritise offloading those
assets, he adds.

While LPs aren’t looking to sell opportunistically, it’s hard to generalise the reasons why APAC investors are coming to the secondaries market, Bradbury says.

Many investors are selling for liquidity and portfolio management. Some are also looking to sell in order to recycle capital.

“I think there are LPs that are looking at their private equity portfolios and saying, ‘Well, that’s a really big USD-predominantly denominated asset – maybe I should crystallise some of that profit for whatever happens next’,” Bradbury adds.

For TR Capital, which six to 12 months ago was much less interested in LP stakes, activity in the market has piqued Robine’s interest: as the number of sellers has increased, discounts have arisen. The firm is seeing both APAC LPs selling international portfolios and international investors looking to offload their China holdings,
for example.

“How long will it last? I don’t know,” Robine adds. “Should we take advantage of it? We think so.”