The Asian story in 2017 was one of continuity. Deals in the region accounted for around 6 percent of global volume, very similar to last year, according to data from Greenhill, and only one Asia-Pacific-dedicated fund hit final close, the $200 million TR Capital III.
At the same time, it was the location of one of the biggest secondaries deals of 2017, Warburg Pincus’s sale of a strip of Asian assets from its 11th fund, which made up a sizeable chunk of the estimated $3 billion-$4 billion of transactions to take place in Asia-Pacific this year. We asked market sources what they expect to see in 2018.
1. Valuation gap to open up in 2018
At the start of the year, a number of sources told Secondaries Investor that as exuberance in public markets died down, investors and general partners in Asia would be more conservative in valuing their assets in 2017. That didn’t happen. But some have seen a gap open up in the way that GPs and LPs are viewing net asset value, and foresee bid/ask spreads getting wider in the year ahead.
“There’s very high expectation, especially from many of the venture crowd,” says Charles Wan of Atlantic-Pacific Capital. “On the GP side, there’s huge expectation for continued valuation uplift. At the same time, on the LP side, there’s a healthy scepticism, a healthy caution. I think that could drive a bit of a pricing gap going forward.”
2. A significant year for the yuan-denominated secondaries market
The yuan primary market is nascent, so it’s no surprise that its equivalent secondaries market is small and shallow. Most stakes in the secondaries market are offloaded by ultra-high-net-worth individuals and a general lack of quality assets has kept institutional investors largely on the sidelines. While opinion is split on what 2018 holds for the market, there’s no shortage of optimism.
“That market has been difficult to play in given the small ticket sizes,” says Michael Hu, a vice-president at Greenhill. “Going forward, probably starting next year, we see [renminbi] being a more active part of the market and institutional investors starting to enter as both sellers and buyers.”
3. An increase in the number of Chinese sellers
On the sellside, according to research by Greenhill, 2016 saw a decrease in activity from Asian financial institutions, mostly Japanese, as sales related to the Volcker Rule tailed off. Most said that they expected their activity to remain subdued in 2017 and 2018. The same goes for Australian sellers, which are likely to take a more opportunistic approach in 2018.
In the view of Tim Flower, managing director at HarbourVest, Chinese investors may step into the breach. Capital controls brought in by the government in 2017 mean that some might not have sufficient US dollars to meet their existing private equity commitments and may have to turn to the secondaries market.
4. Restructurings to thrive? Perhaps not.
Most expect GP-led processes to account for a greater proportion of deals in 2018 than they did this year. According to Greenhill, in 2016 they accounted for 40 percent of Asian deals by number and 50 percent by transaction volume. The immaturity of the Asian market, however, means it is still a struggle to get deals over the line and is likely to remain so. One advisor based in Asia believes there is a lack of ideal candidates: firms that may, for whatever reason, be struggling, but have good enough track records to get investor support for a process.
“In Asia, if you’re first quartile you don’t need to do a restructuring – you just fundraise,” he said. “And if you’re anywhere below second quartile, you don’t fundraise.”
5. Lumpy dealmaking to remain
Estimates for deal value among those Secondaries Investor spoke to range from $3 billion to $5 billion – around 10 percent of the global total and more or less in line what we’ve seen in recent years. Activity is likely to remain sporadic, with one or two big deals making up a large proportion of value. November saw Standard Chartered revive its plan to spin out its Asia private equity team, a deal that, if successful, would be worth more than $1 billion and set just the right tone for the year ahead.