NewQuest reaches $215m first close

Asian direct secondaries firm NewQuest Capital Partners has raised $215 million for its second fund, taking the vehicle to a first close, a source with direct knowledge of the matter told Private Equity International.

The fund, which is targeting between $300 million and $330 million, attracted existing investors LGT Capital Partners and HarbourVest Partners, as well as some new “very large institutional investors”.

NewQuest Asia Fund II is smaller than its $400 million predecessor, but has a “clearly defined set of opportunities”, PEI’s source explained.

The firm has already closed one deal so far, which used a significant portion of what has already been raised in Fund II.

NewQuest declined to comment further on the investment, but in September put in an offer to acquire all outstanding shares in China Hydroelectric Corporation, of which the firm already owned 49.83 percent,PEI reported earlier. The firm made a non-binding proposal of $2.97 per American depository share, a 33.2 percent premium over the ADS closing price on 3 September 2013. It is unclear if this is the first investment from the new fund.

Fund I, which was formed in 2011 when Paul Capital, HarbourVest, LGT and Axiom Asia backed the spin-out of Bank of America Merrill Lynch’s non-real estate portfolio in Asia, is now 80 percent invested and actively divesting its portfolio. The fund is now over half realised.

Asia is more suited to direct secondaries than the traditionalsecondaries model, where firms buy LP stakes, providing NewQuest with numerous opportunities, Darren Massara, managing partner of the fund, told PEI.

“Asia has a significant amount of unexited positions concentrated in the markets that have been the most attractive over the last five or six years – China and India. Those two jurisdictions are where the bulk of our deal volume will come from,” Massara explains.

He declined to comment on fundraising or NewQuest’s latest transaction.

Direct secondaries, which allow firms to take one or multiple positions in assets owned by private equity directly from the GP, is a much more fragmented market, with fewer intermediaries, allowing firms to do more deals.

Traditional secondaries players have struggled in Asia to close transactions due to a lack of maturity in the market, as well as high valuations, industry sources say.

“[We buy] non-core, non-strategic, minority financial positions – so there is just a lot more supply of these transactions than of standard LP stakes,” Massara explained. However, he adds that pricing remains an issue in these deals, too.

“If [GPs] are changing their exit strategy where instead of going trade sale or IPO they’re going to look at a secondary sale, they have to realise that if they’re going to entertain a secondary sale, they can’t expect an IPO valuation.”

This situation is also likely to worsen if the China Securities and Regulatory Commission opens up China’s domestic stock market, allowing thousands of companies on the waiting list to finally IPO. The CSRC released a statement this month indicating that this should happen in early 2014.

But NewQuest is not too concerned about the impact, Massara said.

“Our read of the CSRC’s policy guidance is that it should be harder now for a lot of the companies waiting to IPO to actually IPO because their requirements have become more strict.”

“We are happy to provide liquidity to an investor with a position in a company that needs more time to develop or mature. Some companies won’t qualify [for an IPO] today because they are not as mature from a financial performance [standpoint], or perhaps their internal controls aren’t sufficient and are just not ready to IPO today.”