Secondaries buyers have highlighted the need to tread carefully when assessing China’s growing number of private equity opportunities.
Speaking at the Hong Kong Venture Capital and Private Equity Association’s China Private Equity Summit on Tuesday, Frédéric Azemard, managing partner of Hong Kong-headquartered TR Capital, told delegates that the level of secondaries opportunities in China was “probably the highest we’ve all seen”.
He added that a disconnect between the perception of China risk and the reality among those outside of China presented a “real opportunity” for secondaries buyers, with “very few” investors from Europe and the US now active in the market.
“Then there is more liquidity needed because you have less private equity and less public equity,” Azemard said. “A lot of the deals are proprietary and you have way less people looking at these transactions. And at the same time, it’s true you need to be quite cautious on the type of deals you do and how you do them.”
Azemard said TR considers three factors when assessing China transactions: whether they are in industries sensitive to regulatory uncertainty; whether the underlying businesses are able to grow if US-Sino relations deteriorate further; and whether the valuations are sensible.
Speaking on the panel, Martin Yung, a principal at HarbourVest, said the firm was seeing “a lot of ideas” floated by placement agents and GPs, though not many “are very actionable today”.
“For the time being, I think we still – as a buyer – need a little bit more time to observe what the new normal is for a lot of portfolio companies,” Yung said. “I think the first couple of months of the first quarter obviously had a lot of noise because of the Spring Festival, so we’re really looking at March and April being the new normal for a lot of portfolio companies. And you can’t really make an investment case based on two months of operations.”
Mingchen Xia, a managing director and co-head of Asia investments at Hamilton Lane, added that the bar for China deals is now higher as a result.
“The dealflow continues to be pretty strong, although we have the actionable, non-actionable issue,” Xia said. “We are much more cautious on the venture growth stuff because the exit of those assets will be heavily relying on the IPO market, which is kind of closed or very slow. But on the other hand, we’re trying to do more… control or buyout-orientated deals or assets where you have less issues.”
Xia added that buyers need to become “even more conservative than before” in China.
“You need a much big buffer than two years ago, because the assets we’re looking at right now are primarily the assets being invested in the last two, three years,” he noted. “Those investments were done at a very high valuation. So you need to get much higher discount… The underwriting is much more conservative.”
Despite this caution, panellists were keen to stress the strong potential in Chinese secondaries opportunities.
Min Lin, a founding partner at TPG NewQuest, estimated that there was about $20 billion of annual deaflow in Asia-Pacific, of which about 50 percent comes from China, and only about $10 billion of dry powder available for the region.
“It’s a buyer’s market,” she said. “It’s actually a very good time to invest in secondaries in China… Driven by liquidity, then we secondary players, especially for GP-led transactions, will have the opportunity to get our hands around some interesting assets at interesting prices. And finally, I also agree with everyone here: we also have been very cautious and put a high bar on this because honestly, the outlook – especially for this year from now until end of the year – is still not very clear.”