Market volatility to create new opportunities in Asia

The recent stock market volatility in Asia, particularly in China, is a boon to the private equity secondaries market in the long term, argues an investor.

Secondaries investors believe that volatility will further delay time to exits for portfolio companies, leading limited partners to become more frustrated with their investments and more willing to sell.

“This volatility will likely create more opportunities in the next few years,” said one secondaries investor based at a firm in New York, which also has offices in Europe and in Asia. “Any uncertainty creates fear or questionable decision-making, which creates secondaries opportunities.”

For now, there are some attractive deals in China and Asia in general, but they remain few and far between.

Some of the missing elements for a viable secondaries market in Asia include a mature primary private equity market, older funds and LPs wanting to sell. Attractive markets include emerging markets such as China, India, and smaller countries such as Vietnam and Indonesia, where opportunities are mainly focused on growth capital, while in Japan, Australia, New Zealand and Korea, private equity is a bit more established and is mostly focused on buyouts.

Asian secondaries’ other challenges include the difficulty of obtaining reliable data on funds and on portfolio companies. Having a presence on the ground that understands cultural, legal and political specificities is also important.

“We think Asian secondaries is a growth area,” the investor said. “Asian private equity on a secondaries basis is very interesting, but you need boots on the ground.”

For now, volatility has impacted some deals. As in the US, some transactions were derailed when a potential buyer reassessed an investment and thought it was no longer worth what it had initially agreed to.

“In the short term, volatility could disrupt some exits,” the investor said, adding the firm was about to purchase two Asian fund interests but that the value of one of them was highly dependent on a portfolio company going public in the next couple of months. With that perspective less likely after the heightened volatility, the investor decided to drop his offer on that fund stake and to purchase only the other one that did not depend so much on the public markets as an exit strategy.

He added that family-run companies needing to address succession will be another major driver of secondaries direct opportunities in the future, but generally speaking, sellers of Asian fund stakes are non-Asian LPs.

“We’re seeing much more from foreign LPs selling Asian assets,” he said, noting that he has bought assets from a German institution and from a family office based in Panama.  LPs typically want to sell because of low distributions. “The LP community in Asia is more international than local.”