Schroders Capital is seeing discounts as high as 40 percent in yuan-denominated secondaries opportunities as liquidity constraints and a dearth of institutional buyers creates additional leverage at the negotiating table.

The London-headquartered firm, which has invested overseas capital in China’s domestic private equity market via the Qualified Foreign Limited Partnership scheme since 2020, now has 3 billion yuan ($410.2 million; €388.9 million) of onshore assets under management across five vehicles, according to Jun Qian, the firm’s head of private equity for China. Two of these are still being deployed: one integrated vehicle that includes secondaries, and one targeting primaries.

Qian told affiliate title Private Equity International that yuan-denominated secondaries opportunities were “even more” attractive than their USD-denominated China equivalents at present, in part due to steep discounts.

“You can see the quality of the GPs, you can see the quality of the portfolios, you can see the deeper discount, you can see short-term liquidity capabilities, and also you can see the balance capability of the GPs. So typical US dollar GP-led transactions [in China] may be at a 20 percent discount, but typical renminbi secondaries deals may be at a 40 percent discount.”

Qian added that the substantial proportion of high-net-worth individuals in domestic investor bases has created “consistent” LP-led secondaries opportunities. Such investors, he estimated, account for about 70 percent of LPs by number in yuan-denominated private equity.

“Many of them have their own business; some of them could be in the real estate business,” Qian noted. “So in cases that they cannot honour their capital calls, then there’s transaction opportunities for us.”

Schroders is not the only firm to have recognised the appeal of domestic secondaries. Hamilton Lane launched a Shanghai office in February with a view to pursuing both LP-led and GP-led secondaries opportunities, PEI reported at the time. Coller Capital, meanwhile, is seeking 1.5 billion yuan for its debut fund targeting Chinese fund stakes and GP-leds, Secondaries Investor reported in April.

Secondaries transaction volume in China rose by 71 percent to 1,084 in 2020 and another 70 percent to 1,840 in 2021, according to the China Private Equity Report 2023 from investment banking advisory firm BDA Partners. Activity was driven in part by the declining value of primary market assets, which prompted many LPs and GPs to realise returns by selling their fund shares in the market, the report said.

Chinese private equity funds often feature shorter fund lives, which can leave them with significant unrealised capital at the ends of their terms. The number of expired Chinese private equity funds grew from 18,550 in 2020 to 32,048 in H1 2022, with the latter exceeding the total number of active funds that year, according to BDA’s report. This implies that demand for fund exits will exceed that of investments – something that could be exacerbated by the growth in extended funds.

The nascency of China’s secondaries market has meant there are very few players in the space, Qian noted.

“I personally believe that institutionalisation of the renminbi market in China has only started from 2010, so the secondaries part is even more lagging behind. There are very few institutional players that can participate [in] the secondaries market, which [has] created a mismatch… Players like us have very large bargaining power in such a market.”