This week came the news of another firm using the secondaries market to seed an investment strategy, and one that could give retail investors access to one of the biggest potential growth markets in private equity.
Hong Kong-based growth equity firm Welkin Capital Management will seek $300 million in an IPO on the London Stock Exchange for what it says is the bourse’s first investment trust focused solely on Chinese private equity.
Affiliate title Private Equity International caught up with the firm about their listing and you can read the interview here.
Welkin China Private Equity Limited will be seeded by $15 million of interests in Welkin’s existing Fund II – a $160 million 2017-vintage – and interests in 10 of its underlying portfolio companies for another $15 million.
At first glance, WCPE’s initial strategy appears no different to other listed vehicles such as those managed by HarbourVest Partners, Pantheon and abrdn in that its portfolio will comprise primary fund commitments, LP interests acquired on the secondaries market, and a mix of direct secondaries and co-investments. The difference, of course, is that WCPE is focusing solely on China.
With China expected to surpass the US as the world’s largest economy early in the next decade, interest in the Chinese secondaries market has crept up in recent times. Coller Capital opened an office in Beijing and is exploring the appetite for a dedicated yuan-denominated strategy, as Secondaries Investor reported in November. The country has also delivered some noteworthy transactions, such as GLP’s $5 billion continuation fund process on a logistics portfolio in July.
Some have even suggested that specific industries in the Greater China region such as software as a service, enterprise solutions and healthcare are going to become more appealing to US dollar investors via RMB-USD restructurings due to investors in sectors such as new energy and semiconductors not needing non-RMB liquidity, as Secondaries Investor reported last month.
How big is the Chinese RMB secondaries opportunity? According to data compiled by Zerone, a Chinese secondaries marketplace and data platform, only 30 billion yuan ($4.3 billion; €4.3 billion) of RMB private equity and venture capital inventory assets traded on the secondary market in 2020, out of a total 12.6 trillion yuan, equivalent to a 0.24 percent turnover rate. Zerone estimates that potential secondaries trading could be more than 500 billion yuan annually.
“Today, LP fund stakes are still taking the biggest chunk,” says Miao Li, Zerone’s founder and chief executive. “GP-led opportunities are springing out. The GP-led opportunities will be definitely more with the progression of education on the GP side as well as the sophistication of the buy-side.”
For Welkin, it wants to start with secondaries so it can receive capital back quicker than primary or direct investments and reinvest it in new opportunities, as managing director Jonathan Lau told PEI. If predictions of the Chinese PE market potential play out, it won’t have trouble finding a place to reinvest that capital.
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