Recent years have proved tough for private equity firms looking to exit investments, but that’s likely to change as early as next year, says Darren Massara, managing partner of NewQuest Capital Partners, a Hong Kong-based private equity secondaries firm*.
Trade sales and IPOs – the traditional PE exit methods in China and India – have been “quite challenging”, he notes. “This is slowly ramping up pressure on PE asset owners to find solutions for their investments.”
He anticipates a significant rise in exits in 2015 or 2016. The number of un-exited PE deals that are over nine years old will grow by about 20 times from 2012-17.
“Nine years is a long time in private equity. PE firms will come under pressure as their funds reach the end of their lifecycle. Typically it’s 10 years before extensions,” Massara says.
Moreover, he adds, secondary transactions are now more widely seen as a viable exit option. “No longer is it considered to be a failure if you have a secondary exit, as opposed to an IPO exit.”
That said, the direct secondary market is much more active in Europe and the US than in Asia, notes Massara. Roughly 10% of the exits in Asia today are through secondary transactions, whereas in West it’s closer to about 40-50%.
“One of the main reasons why the secondary market in Asia hasn’t taken off as it has in the US and Europe over the past few years is not because there aren’t enough sellers,” he says. “In fact, there haven’t been enough buyers.”
NewQuest has also added staff to its 15-strong team recently and closed its second fund earlier this month at $316 million.
Mamtesh Sugla joined in May as an analyst responsible for evaluating investments across Asia Pacific. He was previously an investment banking analyst with JP Morgan’s India team. NewQuest also recently added an assistant accountant to strengthen its back-office finance function, and plans to hire another executive in the coming months.
The firm's second fund is focused on direct secondary pan-Asia, particularly China and India, and 50% of the funds are likely to be invested by the end of this month. Massara is also keeping an eye on Southeast Asia for potential secondary deals. “Five to seven years from now, Indonesia could be an interesting place because a lot of PE capital has gone there in recent years.”
The firm is understood to have started fundraising for the second close in February and to have secured capital from a small group of investors, comprising pension funds, family offices and sovereign funds from around the world.
The firm raised $400 million for its first fund from four PE firms – Axiom Asia, HarbourVest Partners, LGT Capital and Paul Capital – which was mainly used to acquire a portfolio of 21 PE assets from Bank of America-Merrill Lynch. The remainder has been used to make direct secondaries transactions. Fund I has returned all the capital drawn for investments.
* An extended interview with Darren Massara appears in the latest (July) issue of AsianInvestor.