Five questions with NewQuest’s Bonnie Lo

NewQuest Capital Partners held the final close of its fourth fund this week, the largest dedicated pool of capital raised for Asian secondaries.

The Hong Kong-headquartered firm closed NewQuest Asia Fund IV on $1 billion, exceeding its initial $850 million target and $950 million hard-cap, which was raised to accommodate investor demand. It was the first fund raised since TPG Partners became a minority shareholder in June last year. Partner and chief operating officer Bonnie Lo speaks to Secondaries Investor about the fundraise and plans to deploy the capital.

How was the fundraising process? 

The fundraise was smooth – not too painful! We launched officially in February so it was similar to the [2016-vintage] last fund, which took around six months. We were able to leverage TPG’s distribution machine. Being internal they have more long-term, personal relationships with limited partners [than most external placement agents].

We divided limited partners up into ones with whom we have existing relationships, which we would manage ourselves, and then others that they have deeper relationships with. They also played a key role in project management and helped bring investors across the line. 

Did you want to diversify in a particular way? 

We’ve always had a tight-knit group of LPs, which we have very close working relationships with and a manageable number. But diversification has always been our goal. We continued to have support from re-ups, accounting for close to 60 percent of the commitments. In this fundraise, we were able to significantly diversify our LP base both by jurisdiction and by type, whilst bringing in new investors that can grow with us for years to come. [Investors in the fund include New York State Common Retirement Fund, which committed $20 million, according to Secondaries Investor data.]

Do you see the proportion of directs getting smaller in favour of GP-led deals? 

Our geographic focus remains the same, our main markets being Greater China, India and South-East Asia, which is small but growing. From a portfolio construction perspective, China would be 50-60 percent, India 30-40 percent, and the balance being South-East Asia. That may change over the course of deployment but that’s generally what we’ve seen over the past funds.

The fund solutions we do continue to have a strong direct flavour to them, so we do due diligence at a company level and get really involved with portfolio management and driving exits over the life of the assets. We’ve seen around one-third fund solutions, two-thirds directs in Fund III and expect that ratio to increase: maybe 40:60 fund solutions to directs in Fund IV. 

Fund solutions transactions tend to be larger and for those we see more co-investment opportunities for our LPs.

How big is your co-investment pocket? 

In Fund III, we had to give a lot more away as a proportion of our deals as co-invests [due to size limitations]. For Fund IV, given the larger fund size, we probably will have more balanced investment through the fund and co-investment. 

For example, we had a couple of deals in the Fund III portfolio that were around the $200 million mark and we put a quarter of those deals through our fund, which is more skewed. We think a more balanced proportion would be 50 through the fund and 50 percent co-invest. 

We’ve had a range of deals from renminbi restructurings involving high-growth companies, which tend to be younger portfolios, then more traditional tail-end fund restructurings of 10-plus years. 

Is it important that you get a discount on entry? 

For Asia, we don’t really look at the net asset value. We do look at discount to fair market value at individual portfolio company levels as NAVs can be all over the place in Asia. Given the transactions we do are more complicated and highly bespoke, we believe we will continue to be able to obtain discounts to FMV. 

You’ve also announced the appointment of a managing director in India, Nitin Agarwal, former co-head of PE at CLSA…

Nitin is a replacement for an investment director who left us at the end of 2018. We’ve been looking for his replacement but are also taking the opportunity to upgrade to someone more experienced, because this is the most senior investment professional in our Mumbai office. [The team in] India has led over $350 million in transactions over the past two years. We expect that India will continue to be a key market for us going forward and thus felt it was important to recruit a senior investment professional like Nitin who has been known to the firm for several years. With Nitin, we now have a private equity investor who has experience throughout multiple business cycles and has overseen the life of an investment many times around.