Valuations muddy the water for Asian GP-led deals

It’s a chicken and egg scenario for manager-led transactions in a region that is several years behind Europe and North America.

This week we wrote about Hong Kong-headquartered Olympus Capital Asia’s attempts to provide liquidity to investors in its $750 million 2007-vintage fund. The deal stalled after the GP and prospective buyers couldn’t agree on pricing – not a good sign for a region that has seen spin-outs but no successful GP-led fund restructurings.

Let’s be clear: the Olympus process wasn’t a restructuring per se. While no formal process had been decided, sources tell me the firm wasn’t considering moving assets into a new vehicle with new terms and new economics. Still, the failure of the deal to close (or even get going) is frustrating for secondaries participants who’d like to see Asian restructurings.  So why haven’t we seen one yet?

For one thing Asia-Pacific is a much smaller and less mature market, accounting for around 11 percent of total secondaries in 2015 by deal volume, according to Evercore. That the GP-led space lags behind North America and Europe is certainly a factor in why we haven’t seen any restructurings yet, sources tell me. But Asian GPs are quick learners and aren’t timid about using something they see works, as Brooke Zhou, managing director at LGT Capital Partners, mentioned to me in April.

That’s another crucial point – until an Asia-based manager successfully restructures a fund, there’s no case study to work from. Sources liken the situation to a chicken and egg scenario. Advisors in North America and Europe know commoditisation helps; the more complex and innovative deals they’ve closed, the more they’ll be able to close.

From a primary GP new to the restructurings space or even the world of secondaries, there is plenty of trepidation, and rightly so: GP-led deals mean LPs will ask managers a lot of awkward questions, something they may not be used to.

“It’s uncomfortable,” one Asia-based secondaries buyer told me. “Many people in the industry don’t like asking each other tough questions and through these processes you end up doing that.”

On top of all this, valuations in Asia are also murkier, for two reasons. One, there are fewer publicly comparable companies and big differences between Asian regions in terms of ownership structure and corporate governance regulations. And two, GPs tend to be more optimistic about valuing their assets than their North American and European counterparts, meaning discounts are more pronounced, one Hong Kong-based source told me. Bidding at a 10 percent discount to what you think an asset is worth is harder for LPs to stomach when the manager values the assets at 10 percent more than you think it’s worth.

With the exception of valuations, the other challenges are hurdles the North American and European markets have overcome. In Asia’s case, it may just take that one deal to open the floodgates.

“There has to be that marquee deal that happens,” the Asia-based buyer told me. “You need to have that one deal that everyone can pin on the wall and say yes, that’s how you make it work.”

What will it take for fund restructurings in Asia to take off? Let me know: