Secondaries players spy opportunity in China reopening

Industry participants believe China’s reopening could present a broader array of buying opportunities for secondaries players.

Speaking at the Hong Kong Venture Capital and Private Equity Association’s annual forum on Friday, Colin Sau, managing partner of direct secondaries firm TR Capital, said the firm is increasing its focus on China in 2023 after a slowdown in recent years.

“[In] 2021, 2022, we were a little bit overweight [to] India and Southeast Asia,” Sau told delegates.

“The overall environment, to be honest, was not that favourable, so we took the time to observe China. But this year, we have seen quite a lot of signs that everything is recovering and everything is moving in the right direction, so probably this year we will do more in China.”

Hong Kong-headquartered TR Capital has participated in some of the most high-profile renminbi-to-dollar fund restructurings to date. Such transactions have become more sector-specific in recent years, with industries including SaaS, enterprise solutions and healthcare retaining their appeal for international secondaries players.

China’s breakneck reopening could result in a more diverse pool of secondaries opportunities, Sau said.

“Last year… certain sectors like new energy, like robotics, like EV, they were still trading quite high,” he said. “But for certain sectors like those related to consumption… the valuations were pretty low… I believe consumption will pick up a lot this year, hopefully – this may be an area we will put more focus on.”

Frédéric Azemard, a partner at TR Capital, told Secondaries Investor this month that he expects prices for China private equity assets to hit a trough in the first quarter of this year due to a bumpy period of reopening.

“Driven by the Chinese government’s significant stimulus measures, prices [could] then rebound significantly to approach pre-covid levels by the end of the year,” Azemard said, adding that he predicts the volume of closed secondaries deals in Asia to reach record levels in the second half of the year.

Domestic dealmaking

China’s isolation in recent years – partly driven by geopolitical tensions and its zero-covid policy – has also sparked opportunities in the yuan-denominated secondaries market. Secondaries giant Coller Capital opened a Beijing office in late 2021 ahead of plans to launch its first yuan-denominated fund.

Speaking at Friday’s event, Jolie Chow, a Hong Kong-based managing director in the strategic advisory group at investment bank PJT Partners, said RMB secondaries presented an opportunity for global funds, “given the potential bifurcation in today’s China investment environment”.

“And so we are seeing secondaries players raising actually dedicated RMB fund using RMB domestic dollars to invest in the domestic market in order to continue to capture the opportunities in China, while not having to compare that [with the] bucket of global opportunities,” Chow added.

TR Capital has also been active in yuan-denominated secondaries through China’s Qualified Foreign Limited Partnership structure, which permits select international managers to invest onshore in yuan using capital raised offshore. In 2021, the firm co-led a process that involved transferring six healthcare assets from three funds managed by China’s Huagai Capital into a 800 million-yuan continuation fund.

Beijing-based IDG Capital is understood to have been the first to use the QFLP structure in a GP-led transaction the prior year, transferring $600 million of assets from a mature yuan-denominated fund into a dollar-denominated vehicle with backing from HarbourVest Partners and LGT Capital Partners.

“There are still quite a lot of domestic opportunities out there,” TR Capital’s Sau said at the event.

“Those are the sectors which normally deserve a premium in the Asia market… like semiconductors, like robotics, like EV. And then the companies don’t want to convert themselves into an offshore structure… so US dollar funds may not have a way to become the shareholder of these companies. QFLP provides us a platform.”