Secondaries Investor made a flying tour of Hong Kong and Japan this week. Here are some of the key themes that emerged.
1 Exits are driving deals
Well, a lack of exits, that is. Participants in Hong Kong and Japan agreed that a huge amount of dealflow they’re seeing, particularly for direct secondaries opportunities, is due to managers not being able to successfully realise investments. This is due to choppy IPO markets in places like China as well as problems with portfolio companies that have underperformed.
“Funds in Asia have had a few easy years, both in terms of fundraising and exits through IPOs. Now they’re having to adapt to a new environment,” Frederic Azemard, a managing partner at Hong Kong’s TR Capital told me. This new environment means GPs are using sales to secondaries buyers as a form of exit, and that LPs in funds are increasingly looking to the secondaries market to sell their traditional stakes.
Distributions have also been slow, I’m told, and this is also leading frustrated LPs to seek liquidity through the secondaries market.
2 Asian institutional investors are the ones to watch
Sovereign wealth funds like China Investment Corporation and Singapore’s GIC will become active buy-side players within a few years, going head-to-head with the very secondaries firms who until now have provided them with syndicated deals and co-investment opportunities.
Japan’s Government Pension Investment Fund and Japan Post Bank, which hold around $3 trillion in total assets combined, are preparing to start investing in alternatives, and this will include a sizeable allocation to secondaries, I’m told. When this happens, the nation’s other institutional investors will follow their lead.
3 GP-led restructurings are on the rise
With around $200 billion raised in Asia between 2006 and 2009, many of these funds are coming to the ends of their lives. Coupled with difficulties around exits, this is leading to an increasing number of GP-led opportunities, especially in India and China, as well as Australia, though for differing reasons.
One firm I spoke to said they are currently looking at four potential restructuring deals in the market, all in India.
Whether such deals will close successfully is another matter, Damian Jacobs, a partner at Kirkland & Ellis in Hong Kong, told me. “There are a lot of variables that impact on the time and pace of execution. You need a highly motivated buyer, seller and GP to get the deal done.”
4 Asian assets are becoming more acceptable in portfolio acquisitions
Several years ago, buyers were less comfortable with the amounts of exposure to Asia contained within large portfolios on the market. This is changing, with buyers willing to purchase portfolios with ever larger portions of stakes in Asian funds.
“Now we’re seeing that buyers are willing to take a higher mix of Asian LP interests in their portfolios,” said Jacobs. “There are more mature Asian funds which are at a stage where LPs might look for a secondaries solution to exit. Buyers are more comfortable bidding for and buying more mature interests.”
5 The market is still nascent, but Asian GPs are quick learners
“When an LP wants to sell their stake in a fund, do they have to pay the GP any fee to get approval?” was one question asked by an audience member at the panel I moderated on secondaries at PEI’s Global Investor Forum in Tokyo. Questions such as this remind us that there isn’t yet the same level of institutional familiarity with secondaries that one finds in the West.
This is not necessarily a problem. “Asian GPs in general, particularly in the emerging markets in Asia – China, India, South-East Asia – are all very quick learners,” Brooke Zhou, managing director at LGT Capital Partners, said during the panel discussion.
While knowledge about complex and innovative deals may lag markets like North America and Europe, GPs in Asia aren’t timid about using something they see works. “The adoption pace is very quick,” Zhou said.
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