1. Valuations will normalise
Asset managers and existing investors in Asia tend to be more optimistic when valuing their assets than their North American and European counterparts, particularly when it comes to GP-led transactions. This has made deals harder to close. But that is likely to change this year, I’m told, as investors in primary and public markets become more disciplined about pricing.
“The primary market environment is less crazy than before, IPO markets are stable – there’s no frenzy. All those factors should benefit secondaries transactions,” Bonnie Lo, partner at NewQuest Capital Partners in Hong Kong tells me.
2. A meaningful GP-led restructuring will close
What sources called the region’s first successful fund restructuring – Committed Advisors was the lead buyer in a process run by Eaton Partners – hasn’t caused a seismic shift in the market. Several other processes were underway before the Christmas break, and a deal involving more than $100 million in traded stakes will close next year, according to Tim Flower, managing director in HarbourVest Partners’ Hong Kong office. This ought to pave the way for more transactions.
3. China will provide the bulk of tail-end dealflow…
Many funds in China are approaching their 10th or 12th year and the pressure is on for managers to find exits. GPs there have tended to drag their feet to maximise their options.
Market sources say they expect to see the first wave of end-of-fund-life dealflow to hit over the next two years, providing a flurry of GP-led restructurings as well as fresh pickings for buyers of direct secondaries.
4. …but India may provide more bargains
Secondaries buyers have been optimistic about the country for several years, and Sequoia Capital’s 2016 sale of a portfolio of early stage Indian assets to a local private investment firm, backed by capital from global secondaries buyers, may have opened the floodgates. Lower valuations in India than China in general also make the country attractive for buyers, with valuations slightly more reasonable than they were in 2015, one source told me.
5. Assets from younger vintage funds will hit the market
The new generation of managers is much more focused on delivering cash returns to their LPs. These GPs are beginning to manage their portfolios more actively, even from more recent vintage funds. This will lead to increased dealflow for direct secondaries buyers and GP-led transactions.
“Fund managers in Asia are much more open minded toward secondaries than they’ve ever been,” Lo said. “LPs have been harping on about DPI [distributed to paid in] for a while and the responsible fund managers have been listening to their LPs, proactively managing, rather than just investing and waiting for an IPO. At the end of the day, investors want to see real returns.”