Waiting in the wings

There is plenty of demand for Asian secondaries – but where are the vendors?

A blossoming secondaries market in Asia is set to become an important component of the private equity market in coming months. At least, that was the message numerous regional fund of fund managers gave sister magazine PEI Asia earlier this year.

Certainly, some Asian LPs are quite visibly interested in the niche. Both Australian superannuation fund HOSTPlus and Korean sovereign wealth fund Korea Investment Corporation have recently awarded secondaries-focused mandates to publicly listed alternative asset manager Partners Group.

Even generalist fund of funds managers in the region seem to be developing a focus on secondaries. Earlier this year Singapore-based Axiom Asia hired Alex Sao-Wei Lee, formerly a Singapore-based principal at global secondaries specialist Coller Capital, signalling that the acquisition of secondary fund interests is likely to be a key investment strategy for its second fund of funds, currently being marketed.

Siddharth Poddar

Buyers of Asian secondary fund interests are clearly not in short supply. However, the question remains whether there are likely to be a substantial number of sellers. The region still has yet to see much actual secondary activity, despite the hype.

In line with what’s happening with the global secondaries market, the biggest reason for a lack of executed secondary deals in Asia continues to the mismatch in vendor and buyer price expectations.

Secondary positions in most Asian funds were trading at discounts at the beginning of this year, but prospective buyers held off expecting these discounts to grow as the effects of the financial crisis caught up with managers’ portfolio companies in full. This, however, did not happen. In fact, what happened was that sellers started to retreat. One LP, who was on the verge of concluding a few secondary transactions in March, said: “As markets have recovered, the sellers have pretty much disappeared. We were close to executing a few transactions, but the sellers pulled back.”

As the markets put the worst of the financial crisis behind them, many institutional investors found themselves much better placed in terms of asset allocation than they were barely six months ago. In fact, secondaries specialist Landmark Partners published a white paper in May arguing that as the net asset values of LPs’ private equity portfolios were expected to decline in the coming quarters, concerns were exaggerated about over-exposure to private equity as a result of the denominator effect. What this means is that LPs may no longer be compelled to sell their fund portfolios on the secondary market once their allocation to private equity comes back into balance.

With LPs finding they have greater room to manoeuvre, they can afford to be selective. If they are forced to choose between hanging onto a fund interest in Europe, North America or Asia, most LPs are likely to keep the Asian interest, according to several surveys.

“I think a lot of global LPs will also be looking for the kind of risk and return profile which will help them meet their goals and I think a lot of those profiles will probably be coming out of Asia,” one placement agent told PEI Asia recently. Recent upticks the Asian economies and stock markets – good news for Asian portfolio companies – provides further reason for LPs to refrain from selling Asian fund interests.

While the broader private equity industry awaits a boom in closeable secondaries deals, it may be waiting much longer for the trend to take hold in Asia.