Which sectors in China are attractive for direct secondaries currently and why?
We are generally sector-agnostic and see ourselves as value investors who look for opportunities to invest in industries with long-term value. Our business model tends to steer us towards sectors where the primary market had invested five to seven years earlier. Through highly tailored transactions, we can provide liquidity to general partners and other direct private equity asset owners in sectors where traditional trade sales or IPO exits may have lagged initial expectations.
How can private equity firms best deal with macroeconomic factors that may affect deals in places like China?
I think it is more important than ever for private equity firms today to be realistic about future growth in their underlying portfolio companies. There are substantial macroeconomic headwinds in the markets in which we operate and business plans have become harder and harder to achieve. Accordingly, GPs need to moderate their growth expectations and become more realistic about the achievable exit options for their investments.
How competitive is the secondaries market there?
The direct secondaries market is still quite nascent and will still take some time to mature. Today we see direct secondaries transactions representing anywhere from 4 percent to 8 percent of total exits in Asia over the past few years. This compares with a much higher number (40 percent to 60 percent) in the US and Europe.
There are a handful of specialised players who operate in this space as well as some investors who participate more opportunistically. Competition will most certainly increase as the market matures, but as a first-mover having raised over $1.2 billion for this strategy over the past five years, we feel we are well positioned to continue to provide innovative solutions to private equity asset owners.
What are some of the challenges of investing in deals there? How is the exit environment?
Probably the biggest challenge of investing in China for most private equity investors is finding an effective way to work with the first generation entrepreneurs who control the lion’s share of the private equity-backed Chinese companies. Being able to align interests with these founders, assist them with creating value at the company level, and then convince them to allow you to monetise your investment is a special skill that is not easily replicable by all GPs.
Couple this challenge at the company level with an immature exit environment (where trade sale markets remain underdeveloped, IPO markets are choppy, and leverage recap markets largely do not exist), we believe private equity investors have their work cut out for them.