How the boom in the secondary market is boosting liquidity options in Asia
Xiao Li, director and head of single family office Gopher Asset Management, said that while overall returns for Asian managers and Asian strategies were outperforming their developed peers, Asia had previously not done so well in terms of distribution. “We all know the challenges for exiting companies in Asia. The public market is not as deep, listings for smaller companies in emerging markets are more difficult, and trade sales is not as developed a route as it is in developed markets,” she said.
But the situation is improving as money comes into the secondary market, providing investors with an additional route to liquidity and companies with an alternative to an initial public offering (IPO). JP Gan, founding partner at INCE Capital, pointed out that the reason the secondary market existed and the reason many companies were delaying IPOs was that both investors and management expected the value of the company to continue to increase.
He added that secondary sales also enabled companies to raise billions of dollars without having to make the quarterly financial disclosures that they would be required to submit if they listed. “The reason IPOs have been delayed is that there is just so much private capital flowing into the late stage venture market,” he said. He added that as an early stage venture investor, he was sometimes happy to cash out a little bit himself because there was so much capital flooding into the market.
Julien Gervaz, CEO at Palico, pointed out that demand in the secondary market meant big name funds were able to claim higher valuations. He said: “The super flagships will sell at a premium. It is really a sellers’ market. It is getting a little frothy. Everyone wants to get into secondaries.”
There are also growing options for funds that are coming to the end of their lives. Yar-Ping Soo, partner at Adams Street Partners, said: “Today we are seeing a lot more options than two to three years ago in terms of managing our liquidity.” These options included general partners restructuring and general partners doing a continuation fund with new limited partners coming in or a rollover.
Gan agreed: “In general in terms of exit there have been more and more options and alternatives. I think for any industry the more alternatives that are available the better it is for the industry.”
Gervaz said from a trading perspective, the options depended on the limited partner-type and the region. “If you are a US fund of funds, we see arbitrage a lot and you will be more biased towards transacting. If you are a pension, we know in countries like France and Germany, they are not as mature in the secondary market and it is very hard to convince Germany asset managers to sell their assets. In Asia, we are seeing a lot more activity. It is definitely something that is growing, especially for funds of funds,” he said.
Soo added that in China over the past few years, the cycle to liquidity had shortened, possibly due to the different funding rounds leading to investors seeing results earlier. Gan joked that the venture capital market in China was running out of letters in the alphabet for funding rounds.
The panel agreed that there were many reasons why investors would sell assets in Asia. Gervaz said these included divesting non-core assets, a new CIO or new partners joining a fund leading to a ‘clear out’, or a new green agenda that meant oil and gas assets had to be sold. “Secondaries is not the fire sale and distress sale that it was 15 years ago when it started. Now it is really about arbitrage, portfolio rebalancing and a way of more actively looking after the assets,” he said. He added that most of the sellers he saw were family officers, asset managers and funds of funds.
Gan pointed out that when it came to selling, as an investor, you were constantly struggling to balance the fear and the greed. “As a professional investor it is your job to strike a balance between the fear and the greed. You have to evaluate all the information in the market. There is a lot of work in deciding whether to buy or sell,” he said. Mike Peng, founding partner at Seas Capital, agreed. “There is always a trade-off between the multiples and the distributions to paid in capital. We always want to give limited partners a good multiple,” he said. With increasing options on how they can exit investments and a buoyant secondary market, funds should be able to continue to offer these good multiples.
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