Opportunity spied in overhang of un-exited PE deals

A paucity of IPOs in Asia is making it difficult for private equity investors to exit portfolio companies – a dilemma that secondary specialists say they can help to remedy.

“There is a significant overhang of un-exited deals out there”, particularly in India and Greater China, said Darren Massara, managing partner of NewQuest Capital Partners, during a panel on private equity secondaries at the Asia Private Equity Forum in Hong Kong this week.

The Asian market for secondaries – whereby portfolio companies are traded between private equity firms – is still immature, say panellists, but is in line with the development of the region’s overall private equity market.

“It's very similar to the US market five to six years ago, where it started to be accepted,” says Neal Costello, principal of Alpinvest.

In the first half of 2012, $13 billion in private equity interests were sold on the secondary market globally, according to data from Cogent Partners.

In Asia, secondary activity is being driven by the GPs themselves, who sell their stakes in portfolio companies to other GPs as a result of the bottleneck in the IPO market and also problems in finding trade sale buyers.

“A lot of GPs now are having problems with exits,” notes Chin Chin Teoh, head of Asia at Greenpark Capital. Some are under pressure to exit investments in order to raise new funds. “The traditional exit routes are congested,” she adds.

At the moment, secondary deals have something of a mixed reputation in Asia, panellists acknowledged. Some private equity fund managers, or general partners (GPs), see it as a lack of confidence by the fund investor, or limited partner (LP), which is seeking to exit its investment.

“The GPs in Asia have less experience in dealing with the secondaries process,” says Teoh. “When we do a deal in Asia, there is some missionary work. You need to educate the GP somewhat in how this works. [That way] they don’t look bad.”

However, LPs might seek an exit to rebalance their portfolio, which is a customary process. “What we're seeing is quite interesting," says Alpinvest’s Costello.

"We're seeing a lot of Asian sellers of US and European assets, and US and European sellers of Asian assets. I have not come across any Asian sellers selling Asian assets.”

He adds that there is a geographic element to the current trend in sales, with US and European firms looking for buyers outside of their regions.

While Asia’s public markets are showing signs of a rebound – signalling a possible near-term resuscitation of IPO activity – panellists say there is still a place for secondaries in the private equity sphere.

“It’s more got to do with the maturing of the market and the fact that secondaries are now being seen as an efficient tool to use to exit, find liquidity and actively manage your portfolio,” says Costello.