A service of

Asia PE secondaries: Why PAG, ChrysCapital do not reflect the broader market

China and India-centric deals involving PAG and ChrysCapital Partners have given Asia secondaries a sizeable kickstart in 2024, but investors appear to favour developed markets and diversity

Private equity secondary transaction volume in Asia Pacific hit a seven-year low of USD 3.5bn in 2023 as falling valuations made deals difficult to price, leading to an unbridgeable gap between what buyers were willing to pay and sellers were willing to accept. GP-led deals alone plummeted two-thirds to USD 1.6bn, according to Greenhill, driven by a drop-off in single-asset continuation vehicles.

Three months into 2024, investors and advisors claim to see chinks of light in a previously murky market outlook. Stabilising economic conditions and sellers reviewing their pricing expectations are seen as contributing factors. LGT Capital Partners, for example, has closed half a dozen deals year-to-date – half LP-led and half GP-led, some of them carry-overs from 2023 – and plenty more could be done.

“There are a lot of opportunities floating around in the market,” said Brooke Zhou, a partner at LGT. “The pipeline wasn’t as full this time last year. Deals were available, but the market conditions were poor. Now, we find that people have become more realistic in terms of pricing.”

Approximately USD 1.2bn will be added to the running total for 2024 from two GP-led deals involving PAG and ChrysCapital Partners. Yet neither is in line with broader market trends. The first is a rare and drawn-out LP tender offer for a China-heavy portfolio that arguably hasn’t delivered the quantum of capital expected, the second a small stake in a very large and reasonably well-traded company.

Rather, secondary appetite mirrors primary appetite as investors gravitate towards the region’s more developed markets and the comfort of stable economies, mature assets, control transactions, and greater visibility regarding exits. India is the exception, but even there, investors prefer the implied safety in diversity of multi-asset over single-asset continuation vehicles.

“I was down in Australia earlier this year and I’m going back soon. For global investors like us, looking at GP-led deals, that is the most attractive market. While Japan and Korea are interesting, there is often a language issue, which makes it harder for global investment committee,” said one secondary investor.

“No Asia deal is easy because they are competing against US and European situations that are more attractive. I don’t mean risk-adjusted, where the Asian deal gives me 3x, the European deal gives me 2x, and the extra 1x isn’t enough to justify the risk. The returns in the US and Europe are just better.”

This feeds into a general sense of uneasiness. Advisors, including those busy populating investor pipelines with new GP-led transactions, admit the market is slow and there remains an element of uncertainty. Charles Wan, a managing director at Rede Partners, pointed to improved sentiment but quickly added that the market doesn’t seem normal, lending itself to “idiosyncratic transactions.”

Similarly, Michelle Cheh, a partner in the investment funds group at Kirkland & Ellis, said her team had enjoyed a far busier first quarter than might have been expected at the end of last year, but a narrowing bid-ask spread doesn’t necessarily indicate an impending surge in transactions.

“While LP trades always close, GP-led deals are harder to predict,” Cheh said. “A lot depends on the attractiveness of the asset and the manager. Investors are picky.”

The PAG process

PAG’s tender has been picked over for about 12 months. It was designed to provide a liquidity option to LPs in the GP’s first three funds while delivering a stapled commitment for Fund IV. The closing of the deal last week was tied to an expected final close on Fund IV at the end of April, according to a source close to the situation. PAG initially sought to raise USD 9bn but then adjusted its target downwards.

Tender processes are notoriously difficult to manage. They are typically pitched as solutions to problems such as a fundraise that lacks momentum, team turnover that requires a re-underwrite by LPs, or some kind of dislocation in the investor base, and they are high maintenance. It is not unusual for tenders to fall short of expectations, with limited selling volume translating into a meagre staple.

“There’s always a bit of risk, and then timing is so important. If the fund is too old, there’s no upside for the buyers, and sellers must accept a big discount [to net asset value, NAV]. There is an element of having the stars align for a tender to be successful,” the secondary investor explained.

A secondary transaction advisor emphasised the importance of gauging demand among sellers and buyers before launch and establishing mutually acceptable price points. “No wants to spend time getting approval from their investment committee only to be scaled back 10x,” the advisor added.

Only two tenders of comparable size have been completed in Asia – by TPG in 2018 and Baring Private Equity Asia (now EQT Private Capital Asia) in 2021. The TPG transaction, worth about USD 1bn, saw USD 1 of primary capital committed for every USD 2 of secondary sold. The PAG deal was marketed at 1:3.

PAG’s situation was complicated by the level of China exposure in the portfolio – put at more than three-quarters of the USD 11bn in assets under management (AUM) across the three funds – and uncertainty as to how many LPs were keen to divest this exposure and at what price.

Moreover, the prize asset, China-based AirPower Technologies, was on course for an exit. Hangzhou State-owned Capital Investment & Operation established a vehicle to acquire the company in May 2023, a few weeks before the secondary process launched. The buyer consortium, which includes PAG, has yet to close out what reportedly could be a CNY 42bn (USD 5.8bn) transaction.

One LP with exposure to multiple PAG funds reaffirmed a view shared last year that the discount to NAV was too steep to justify selling, given the impending AirPower exit. This seems to reflect broader investor perspective, with the tender generating about USD 600m-USD 700m in sales volume that was skewed towards Fund I, according to multiple sources familiar with the situation.

The pricing was in line with earlier guidance: 50%-60% of NAV for Fund I and 70%-75% for Funds II and III, based on the most recent marks. There was sufficient selling volume from Funds II and III to meet the minimum requirement and the primary-secondary split stayed at 1:3, according to one of the sources.

The size of the primary commitment is unclear. Abu Dhabi Investment Authority (ADIA) led the secondary, but as an existing investor in Fund IV, its participation in the staple is not guaranteed. The source said that ADIA was taking a “holistic view” of its overall relationship with PAG across funds and co-investment, and “received some credit” in the secondary for its preexisting commitment to the fund.

Two other sources, one briefed by PAG and the other by ADIA, claimed that the sovereign wealth fund’s cash participation in the staple was negligible. The 1:3 ratio applies to the three other investors in the deal. PAG, ADIA, and Fairview Capital – which advised on the secondary – declined to comment.

The unanswered question is whether it was worth the effort. On one hand, PAG has allowed some LPs to exit and deepened ties with one that wanted to remain, despite challenging conditions for China assets. On the other, the deal appears to have fallen short of generating meaningful new capital for Fund IV. Investors and advisors said they see no interest in tender processes from other GPs in Asia.

Distorted mirrors?

It is suggested by some industry participants that the PAG deal can offer clarity as to where China secondaries are trading – perhaps serving as a wake-up call to investors reluctant to adjust valuation expectations. Others caution against comparing a portfolio where much of the China value is concentrated in one control transaction to the growth equity positions held by most local managers.

“I think at USD 0.50 on the dollar, you would be very happy in today’s market in China,” said a second advisor. “We’ve looked at deals priced at USD 0.30-USD 0.40 on the dollar, but even then, how do you underwrite a real exit? People don’t see anything happening in the next three years.”

The ChrysCapital deal, meanwhile, does reflect a wider interest in India, but it shouldn’t be viewed as a replicable model. A dozen single-asset continuation vehicles have closed in Asia to date, and this would be the second involving a minority stake. Investors were reassured by expectations that the target, the National Stock Exchange of India (NSE), will soon list, according to sources familiar with the situation.

Two fund-of-funds – both established secondary investors in the region – are anchoring a continuation vehicle of about USD 600m that will absorb positions held by ChrysCapital, which acquired a 5% interest in 2016, and its co-investor GIC, two sources said. NSE is the last asset in ChrysCapital’s sixth fund, which is nearing the end of its life.

While NSE shares are not listed, they trade on the unlisted market, with the company achieving a valuation of INR 1.45trn (USD 17.4bn) in September 2023 based on the average weighted trading price during the month, Business Standard reported. As one of India’s two principal stock exchanges, NSE is financially stable, with revenue and net profit of INR 35.4bn and INR 18.1bn in the 2023 financial year.

A third source added that the secondary transaction drew a lot of investor interest – including from groups that seldom look at deals of this type in Asia – because of the quality of the business, the scarcity value of a 5% block of NSE, and the expectation that an IPO would be heavily oversubscribed. ChrysCapital did not respond to a request for comment.

In this sense, NSE could be viewed as an extreme example of selectivity among investors. Martin Yung, a principal at HarbourVest Partners, observed that buyers globally are concentrating on finding what they believe to be the best assets in broader portfolios. If a GP comes to market with a mixed-bag portfolio, it is unlikely to get traction. A deal that is more carefully created would attract a second look.

“I don’t think the bid-ask spread has dramatically narrowed,” Yung explained. “It boils down to the quality of the opportunities. If we can find companies that are best in class globally, there will be appetite for transacting around them. How many of them are in this part of the world in the current environment? That is to be determined.”

Debatable depth

Most secondary investors are pursuing multi-asset deals in India. TR Capital is one of them, having shifted focus from buying secondary shares in growth-stage companies on a direct basis, where competition is now rising, to cherry-picking collections of 3-5 positions out of 20-company portfolios, where the discounts to NAV are still meaningful.

The mid-market secondaries specialist is also interested in Japan, but CEO Paul Robine observed that many investors are now targeting developed Asia. “Are they doing that for good reason or is it a default response because they cannot transact elsewhere?” he asked. “We will see in 5-6 years.”

LGT’s Zhou agreed that interest in Asia ex-China could be rising as investors that want or need to deploy capital in the region look for alternatives to China. J-Star closed Japan’s first continuation vehicle last year, but no more managers have moved from contemplation to execution despite concerted efforts by secondary advisors to enervate and educate the local mid-market GP community.

Industry participants offer several possible explanations for their reticence. First, private equity exits in Japan have held up even as the region-wide picture deteriorated, so there is no need to explore alternative channels. Second, continuation vehicles can lead to unwelcome tax outcomes, especially where a single lead investor takes a large chunk of a portfolio.

“There is a maximum amount that can be held by a single offshore partnership above which there is tax liability and some book-through to the investor level as well,” said James Ford, a partner in the private funds group at Allen & Overy. “Unless an investor can come in through multiple accounts that do not have common ownership, it could be liable for Japan withholding tax on any capital gains.”

Finally, securing approvals from the investment committees attached to different fund vehicles can be burdensome, especially when dealing with domestic investors. “For many of them, half the LP base is Japanese investors, and they may not appreciate secondaries. The mindset is: you only want to do a continuation fund because you can’t exit,” said the second advisor.

It Is hoped that acceptance of GP-led solutions will develop in Japan much like in Australia. Historically, the market has seen a handful of multi-asset transactions, and in the past three years, it has accounted for about half of Asia’s single-asset continuation vehicles. This includes the only single-asset deals, involving Pacific Equity Partners and Crescent Capital Partners, to close in 2023.

The addressable pool is deeper than Japan – one advisor estimates that at least 20 Australia-based GPs could feasibly launch continuation vehicles – but deal flow is still relatively thin. Frewen Lam, a managing partner at Sydney-based Roc Partners, doesn’t expect much to change in the near term.

“While the broker community is trying to drum up business, I think it’s unlikely that ends up with substantial deal flow. For secondaries to work, there must be a need for liquidity. It’s not just demand-driven. If liquidity is already coming through M&A, there is no need,” he said.

“Where there is a need for liquidity is in the venture market in Asia. They represent the biggest risk, and when money is cheap, people have the appetite to take risk. Now that money is more expensive, we shouldn’t be surprised to see transactions in these peripheral markets most impacted.”

Supply-demand mismatch

Venture capital can be attractive to secondary investors because they tend to target funds later in life than for buyout, when most of the capital has been invested and winners have emerged from the portfolio. Most holdings are ascribed minimal value, and the underwriting focuses on actual and potential unicorns that have moved from pre-revenue to revenue and perhaps to cash flow positive.

Several GP-led transactions involving Southeast Asian VC firms fell over last year when investors redrew terms in response to falling valuations and discounts were too steep for sellers to stomach. According to Shane Chesson, a co-founder at Openspace Ventures, had investors “not been so aggressive on pricing, they could have got deals done and made money from the rebound in the last quarter or two.”

Secondary pricing for venture and growth assets in Asia Pacific fell from 72% of NAV in 2021 to 63% in 2022 and 60% last year, Greenhill found. In contrast, buyout strategies have been more resilient, declining from 88% to 81% over the same period.

Most transactions feature some structuring, such as preferred equity, whereby investors pay up for assets on the condition they receive all exit proceeds until a certain return threshold is reached. Even this, however, might not be enough to address concerns about valuations – specifically, whether VC firms have adjusted their marks properly and whether there is a viable path to exit.

“For us, it’s all about the exit path,” said Robine or TR Capital. “Can you buy good quality assets in Southeast Asia at discounts? Yes. But how do you exit? The IPO market is so small. I don’t expect pricing to change much from last year. If you were offered USD 0.25 on the dollar with preferred equity last year, that’s what you’ll get this year.”

Southeast Asia deal flow is not restricted to VC, but some of those transactions may return to market. There is also a surfeit of supply coming out of China, most of it venture and growth equity. This points to a wider supply-demand mismatch, according to Lam of Roc: “Buyers focus on profitability and liquidity. In markets like China and India, a lot of assets aren’t profitable and the visibility on exit isn’t great.”

Even with stabilising economic conditions and a perceived valuation reconciliation, there’s no guarantee that deals creeping into pipelines will ultimately transact. The reality is that GPs might not be putting forward the sorts of opportunities that resonate with investors in terms of geography and strategy, diversification, and execution risk.

“I don’t believe GPs in Asia are fully up to speed on secondary market dynamics, especially in a global sense. There needs to be more education,” said Yung of HarbourVest.

“That’s why the percentage of deals that launch and don’t get done is higher in Asia than elsewhere in the world. In the US and Europe, transactions are taking longer to close, but most that get launched do close compared to before. In Asia, you often see deals hang around for a year or more with limited progress or taking up to a year or longer to close.”