View from Hong Kong: Wary buyers, tricky assets and tough conditions

Secondaries Investor was in Hong Kong this week catching up with sources and learning more about the Asian secondaries market. Here are some takeaways from the trip.

Lots of deals, little quality

Several people bemoaned a relative lack of high-quality Asian assets in the secondaries market. For every flow name that gets instantly snapped up, there are five portfolios of mature, discounted Chinese venture stakes or proposed restructurings of lower-quartile funds that don’t. Asia accounted for around 10 percent of funds that changed hands in 2018 by number, according to data from Greenhill. Expect that figure to be less this year, said one secondaries advisory professional based in the region.

Valuation gap a growing problem

A valuation gap has often been a feature of the Asian secondaries market, partly due to the rich valuations the region’s GPs tend to ascribe to their assets. According to one director with a large asset manager, changing buyer behaviour is causing this gap to widen. Despite the growing pile of dry powder dedicated to secondaries, buyers are becoming more particular about the deals they back and the price they are willing to pay. If the price isn’t right, they just leave it. “Buyers don’t feel that they have to fill an Asia quota,” the director said. “Asia can fill anything from 2 percent to 10 percent of a [global] secondaries fund.”

Mixed views on trade war and Hong Kong troubles

While some felt that economic and political turbulence has had no impact on business, others beg to differ. People spoke of how quiet Central Hong Kong seems and some US LPs have not been able to enter because a travel warning issued by the US government risks voiding their insurance. One placement agent spoke of a European LP pulling a sizeable commitment to a Hong Kong-based fund at the last minute due to trade war fears. “If you were setting up an Asia office today, there’s no way you’d pick Hong Kong over Singapore,” he said.

Bright spots in Australia and China

Australian sellers are having a very active 2019, said one advisor, who expects at least six portfolio sales by Aussie LPs to close this year. While many are getting rid of older funds or cutting down their stable of managers, some sales are driven by a regulation forcing pension funds to disclose their management expense ratios, an indicator of how much they pay in fees to fund managers. In several countries, including China, the need for insurance companies to increase their capital requirements could become a welcome driver of dealflow, said one London-based buyer in town for a conference.

Have economic and political headwinds affected your Asian business? Write to the author at rod.j@peimedia.com