Global Secondary Market Expected to Surpass $25B, as Asian Deals Take Off

Private equity funds spent the last few years investing unprecedented sums in Asia. Now, secondary funds are swooping in for their share.

That’s the impression from Monday’s announcement that a consortium of secondary investors has acquired a portfolio of stakes in Asia-based private companies from Bank of America valued around $400 million. The existing BofA management team will stay on, operating under a new name — NewQuest Capital Partners.

Four firms – Paul Capital, HarbourVest Partners, LGT Capital Partners and Axiom Asia – participated in the transaction, which took about two years to complete. Now that it’s done, Paul Capital Partner Bryon Sheets says he considers the deal “a bit of a landmark transaction.” For one, it’s the largest private equity secondary transaction he’s aware of for Asian assets. And with a portfolio spanning at least five countries and industries from energy to financial services, it’s also among the most complex.

Following is a Q&A with more of Sheets’ comments on the deal, and forecasts for the emerging markets secondary industry.

Q:  You opened your Hong Kong office in 2007. How has secondary deal flow in the region evolved since then?

A:  We’re seeing a lot of deal flow — more than we expected when we opened our office. Partly that’s due to the volume of investment in China and India and other parts of Asia, and that has resulted in a robust environment for sellers seeking faster exits. Also, there are very few players who can transact secondaries in Asia. It requires local on-the-ground expertise.

Q: How much have you invested so far?

A: Since 2007, we’ve sourced over $4 billion in Asian private equity secondary transactions and committed to about half a billion.

Q:  How does the deal flow compare to what you see in the U.S. and Europe?

A: In Asia, the assets tend to have higher growth rates than we see in Europe and the U.S. and little to no leverage. The reason for that is it’s prohibitively expensive to get financing for large and medium sized buyout transactions.

Q: So, with the BofA deal wrapped up, can we expect to see more of these large secondary transactions?

A: We see the market growing considerably over the next couple of years. This transaction has demonstrated that portfolios of a half billion dollars can be monetized in a single deal, so I think that has generated a lot of interest, not only from other banks. Now an emerging market has a liquidity profile that’s on par with the U.S. and Europe, and there are buyers with the expertise to do diligence.

Q: We’re seeing a lot of upbeat forecasts for the global secondary market. What are your projections at Paul Capital?

A: We think it will be a better year than 2010, which was itself three times the level of 2009. Our sense is that somewhere between $8 billion and $10 billion worth of secondary transactions have taken place to date, and our sense is that $25 billion to $30 billion is what we would expect for the year.