Private equity secondaries on rise in Asia

Weakening Asian emerging market growth – particularly in China and India – is setting the stage for private equity secondary deals in the region, says Juan Delgado-Moreira, head of international at US-based PE firm Hamilton Lane.

The Hamilton Lane Secondary Fund III held a final close last month at $900 million, above its $650 million target.  It will primarily acquire other investors’ stakes in existing private equity funds, while also considering direct secondary PE investments on a selective basis.

About $250 million has already been invested globally, which includes Asia. Delgado-Moreira declined to detail specific investments but notes: “We are paying a lot of attention to China and India.”

“Some [PE fund] investors are seeing the current slowdown in China, and the growth issues and policy issues in India as a mid-to long-term cloud in the horizon" and as result may decide to sell their stakes in funds focused on those markets.  

“[It] has created a softening in the valuations” of the funds, says Delgado-Moreira.

While the outlook on individual Asian markets by private equity limited partners (LPs) may have changed, it is not a result of poor fund underperformance of the 2005-06 vintages because of the great financial crisis.  “Unlike European PE, for example, Asian PE performed well throughout the [crisis], by and large,” he adds.

Some investors are selling their fund stakes in order to streamline their portfolios and reduce the number of relationships they maintain with fund managers, or general partners (GPs).

It is a trend that has recently taken hold at large US pensions, according to data provider Preqin, which notes as an example the Pennsylvania State Employees’ Retirement System’s plan to reduce the number of GPs in its portfolio from nearly 150 to between 40 and 50 over the next decade.

Japanese institutions, which are similarly rebalancing their portfolios, are among the leading Asian investors in the secondary market, says Delgado-Moreira.

“[They’re] not abandoning the PE asset class, just simply selling some commitments in some [fund] vintages to manage the size of [their] portfolios.”

Asian insurers were also among the investors in Fund III, as was Korea Teachers Pension Fund, which allocated $30 million to the vehicle, as reported by AsianInvestor.

Hamilton Lane Fund III’s global investor base includes pensions, family office, high-net-worth individuals, sovereign wealth funds, endowments, foundations and insurance firms.

The fund was oversubscribed – a phenomenon seen among other secondary vehicles raised by major PE firms that achieved a final close in the past year.

They include the €2 billion ($2.7 billion) Partners Group Secondary 2011, Harbour Vest Partners’ $3.6 billion Dover Street VIII, the $1 billion Adams Street Global Secondary Fund 5, and LGT Capital Partners’ $2 billion Crown Global Secondaries III.

The strong trend of oversubscriptions among secondary funds is relatively new and one that not many forecasted five years ago, says Delgado-Moreira.

“The interest in secondary funds, overall, has increased.” However, not all secondaries managers have had oversubscriptions, given a “flight to quality” by investors, he notes.  

“But the reality is, five to six years ago, the [secondaries] market was not even half the size that it is today,” says Delgado-Moreira.