Emerging markets secondaries still in their infancy

Secondaries in emerging markets are still in the early stages of development, with the bulk of the activity focused on Asia and direct secondaries.

“All secondaries transactions have the potential to provide liquidity in emerging markets, but they’re quite challenging to execute,” Chris Bonfield, a managing editor with advisory firm Greenhill Cogent, said during a panel on secondaries at the Emerging Market Private Equity Association’s Global Private Equity Conference.

He noted that about 70 percent, of deal volume in secondaries – which according to Greenhill’s tally totalled $37 billion last year – involves US funds. At least 20 percent involves European funds, while the rest of the world accounts for the remainder.

“Secondaries is still very nascent in Asia,” said Darren Massara, a managing partner at NewQuest Capital Partners in Hong Kong. His firm focuses mostly on direct secondaries and GP-led transactions in Asia.

Bonfield noted that emerging markets with some, albeit subdued, secondaries activity include South America, particularly Brazil, followed by Eastern Europe, the Gulf region and Africa. Hardly any secondaries transactions take place in Africa because the primary private equity market there is still very young.

“The challenging part in Brazil has been around currency volatility and political risk,” said Bonfield. “You need to price in some risk premium for those factors beyond what the assets are priced at.”

In Asia and other emerging markets, transactions have mostly been direct secondaries.

Massara noted it is not uncommon for Asian GPs to sell a portfolio of companies when a fund approaches the end of its life rather than try to restructure a fund which can be a lengthier and more cumbersome process.

At the conference, at least two emerging market GPs focused on late-stage venture capital and growth investing noted that they often invest on a secondaries basis in existing portfolio companies when early investors want to leave.

Baring Vostok Capital Partners, for example, did so in Russian search engine Yandex a year before the company went public in 2014.

“We like late-stage secondaries opportunities in our existing portfolio companies from existing investors,” said Michael Calvey, founder and senior partner at Baring Vostok.

Looking forward, Bonfield said it will take a few years for emerging market secondaries to take off significantly.