NewQuest: Asian direct secondaries is ‘nascent’

It could take between five to seven years for Asia’s direct secondaries market to mature, according to Amit Gupta, partner and chief operating officer at NewQuest Capital Partners.

What are the main drivers behind the recent increase in secondaries activity in Asia?

The Asian secondaries market has definitely gained traction in the past four to five years. Several factors have contributed to this growth, including increasing allocations to Asia, greater dry powder within the asset class and the entry of new participants.

General partners are gradually beginning to view direct secondaries as an effective tool to manage team bandwidth and maximise returns, as opposed to a sub-optimal solution that would portray them as ineffective managers. There are clear signs of a growing structural shift, particularly in China and India, which could lead to the direct secondary private equity market in these regions accounting for about 20 percent of total exits over the next three to four years. Both these markets will see over $1 billion in liquidity created annually through the direct secondary route.

Do you anticipate the upward trend in secondaries pricing continuing in the short-term? 

In the direct secondary market in general, pricing continues to remain attractive. We are seeing that assets that have reached a critical size (over $75 million) are being auctioned. Some funds sell their stakes as part of stapled transactions, where they offer their holdings alongside a primary fund raise within the investee company. While we do not participate in the market for limited partner stakes, we have seen that pricing for such stakes in mature Asian GPs is getting pretty tight.

Secondaries markets in the US and Europe are said to be increasingly ‘institutionalised’ and mature – are there any signs of that happening in Asia?

The direct secondaries market in Asia is still nascent, with direct secondaries accounting for less than 10 percent of exits. For direct secondary stakes, there are only a handful of credible players who have built the infrastructure, have the skill set, understand the landscape and have discretionary dry powder to invest. We think this part of the business is still evolving and it will take another five to seven years before the direct secondaries market in emerging Asia begins to mature. In our core markets of China and India, we hardly see any competition in the direct secondary space. We do see competition from big primary funds in selected single assets for stakes in companies that have now become sizeable, hence transaction sizes are upwards of $75 million.

How much progress has NewQuest made in deploying capital from its latest fund and will the investment strategy of Fund II differ from its predecessor fund?

NewQuest has raised $326 million through various vehicles for its second fund that held a final close recently. As of now, over 50 percent of Fund II has been deployed and we expect to reach a deployment level of 80 percent or more in next 12 months.

We continue to focus on direct secondary investments. The opportunity is still considerable. Our analysis shows that the number of un-exited private equity investments that are nine years or older could be 20 times larger in 2017, than in 2012. This will also include a lot of end-of-fund-life assets that would be ripe for a deal.