An IPO bottleneck in Asia has congested the favoured exit route for private equity general partners (GPs), creating what would appear to be an opportunistic environment for secondary specialists.

Adding to the promising outlook is the fact that most of the major secondary players from the West have established outposts in Asia.

While a few, such as LGT Capital Partners and HarbourVest, have long had a presence in the region, others have set up regional offices over the past couple of years. They include Lexington Partners, Pantheon and Greenpark Capital.

“We are seeing secondaries set up, and we see a lot of activity being pursued,” says Bob Partridge, Ernst & Young transaction advisory services leader for Greater China.

“When you’ve got a slowdown in traditional exits – with IPOs being predominant across this market – GPs trying to raise funds and LPs [limited partners] not wanting to give money because realised returns have been low, it’s a prime breeding ground for a secondaries market,” adds Partridge.

However, industry practitioners readily acknowledge that the Asian secondaries market is still in a development stage that is about five to six years behind that of the US.

“The activity we’ve seen to date has principally been small to lower mid-sized secondary deals”, with deal values of less than $30 million, says Partridge.

Global secondary players are more accustomed to deals at least 10 times larger in the US and Europe.  

Secondary PE deal flow worldwide averages $20-$25 billion annually, according to industry estimates, although there are no accurate figures on Asia’s share.  

“You want to have $1-2 billion per year in Asia,” Neal Costello, head of the secondary investments programme in Asia for AlpInvest Partners, told delegates at the recent Asia Private Equity Forum in Hong Kong. “We see that growing exponentially.”

One firm that plans to increase its deal activity in Asia is Partners Group, a global private markets investment management firm which closed its secondary fund at $2 billion in December. 

The firm has “sourced several billion dollars of Asian deal flow” over the past year, says Adam Howarth, head of secondaries for Asia at Partners Group, which manages about $38 billion in assets globally.

“The most active sellers, in terms of volume, have been public pensions and financial institutions, primarily in the US and Europe,” says Howarth, with high-volume deal flow concentrated on large-cap, pan-Asian funds.

In terms of annual turnover, however, “the secondary market in Asia still trails the more developed markets of the US and Western Europe”, notes Howarth. 

Partners Group expects Asia to catch up in the next few years, and as such is in the process of adding to its regional team. 

“In Asia, the most attractive market to us is China on a risk-return basis,” says Howarth. The firm is seeking opportunities in the consumer and healthcare sectors.

China is home to what might be Asia’s largest backlog of IPOs, with nearly 900 businesses pending regulatory approval as of December.

However, Partridge at E&Y recalls a cautionary tale of a failed secondary deal on the mainland of about $80 million in size. A private equity firm holding a stake of less than 20% in a Chinese company was unable to convince the founder, who served as chief executive and general manager, to support a sale of the stake to a prospective secondary buyer. 

“The [PE firm] had legal rights to do what they wanted, but the founder became difficult in dealing with the secondary fund. The PE fund was ending its lifecycle [in 2012] so they were in desperate need to realise that investment,” says Partridge.

He adds: “Obviously the secondary fund saw that all they were going to have was problems [in the future].”   

*A full version of this article will appear in the February edition of AsianInvestor magazine.