Neuberger Berman: Secondaries buyers could find themselves in China’s ‘best vintage’

Secondaries investors buying into Chinese private equity funds could enjoy some of the market’s best vintages, according to a senior executive at Neuberger Berman.

Speaking on the sidelines of the Hong Kong Venture Capital & Private Equity Association’s Asia Private Equity Forum on Friday, managing director Kent Chen told affiliate title Private Equity International that some China funds were trading at a 50 percent discount to net asset value.

This follows a decline in valuations caused by less dry powder chasing the same deals, he added, noting that fundraising had become more difficult due to pandemic disruption and some investors “pulling back” from the market.

“If something which has already come down in NAV terms is then applying another 50 percent discount to NAV, it is definitely more attractive than a few years ago. So, if certain investors have the dry powder and the perspective to do some deals in this market, they may end up in one of the best vintages for China investors relative to five or 10 years ago.”

Secondaries transaction volume in China reached 102.1 billion yuan ($14.4 billion; €13.3 billion) in 2022, up 53 percent from 66.8 billion yuan in 2021, according to data compiled by Zerone, a Chinese secondaries marketplace and data platform. Activity was driven in part by the fact that many Chinese government investors were keen to exit funds that were approaching the end of their life cycles, according to a Chinese-language white paper published by Zerone last year.

A growing number of international firms are eyeing the domestic secondaries market, including yuan-denominated assets and funds. Coller Capital, Schroders Capital and Hamilton Lane are among those active in this space, with the former seeking 1.5 billion yuan for its debut China fund, Secondaries Investor reported.

Some, including Schroders and Hamilton Lane, have opted to enter China through the Qualified Foreign Limited Partnership scheme, which enables firms to convert overseas currencies into yuan. Neuberger Berman is looking at this strategy “with interest”, Chen said.

“It’s not a market that we are comfortable enough with to move [into] in a big way,” he noted. “We are a patient, long-term investor. So, we will continue to study and monitor the market and when it’s ready – when we are ready – certainly we will be in a good position to pull the trigger. But not at this moment.”

China’s wave of secondaries opportunities follows a slowdown in private equity activity driven, in part, by geopolitical tensions and regulatory uncertainty. Fundraising has become significantly more challenging, presenting a potential opportunity for managers with the means and conviction to deploy.

“For those Chinese GPs who are able to raise a decent amount of capital, I think they will be in a very unique, advantageous position, because simply there’s less competition and valuations are much more attractive,” Chen said.

“And then there will be more distressed sellers, large conglomerates or property developers who need to sell their non-core assets to repay their loans, etc. So, those are actually very attractive opportunities for GPs who have the dry powder and expertise to execute.”