As hundreds thronged a financial conference in Hong Kong last year to hear an executive of US private equity firm Bain Capital, Doug Coulter took a seat in a nearly empty room next door at a separate session on the secondary part of the buyout industry in Asia. Coulter, Asia head of private equity for LGT Capital Partners, was encouraged by what he saw.
----- Lexington Partners, Pantheon and Green Capital launch Asia ops
Five years after global buyout giants first flocked to the region to tap its growth, Asia's private equity market has reached a tipping point. Maturing funds, a crop of inexperienced managers and global market instability are all opening the door for so called secondary players to come in. Lexington Partners, Pantheon and Green Capital have launched in Hong Kong in the last year alone, joining LGT and others already here.
"I just thought, 'Wow, nobody is covering this. This is a great opportunity,'" Coulter recalled, reminiscing about the 2011 Asia Venture Capital Journal event.
NewQuest, which spun off from Bank of America's private equity arm, recently opened in Hong Kong as well. Most of the major secondary firms are now set up in Asia, taking a crack at what is a relatively small field compared to the traditional buyout industry. These firms face a budding opportunity and a major challenge, as they too are susceptible to the region's volatility and will be playing in a smaller market than in other parts of the world.
Secondary investors operate in several ways. They can buy stakes in private equity funds from investors seeking an exit, take over managing a company or a portfolio of companies held by a private equity firm, or they can team up with a private equity firm doing a leveraged buyout by offering cash to support a bid.
Secondary players in Asia have performed all three of these functions in the last year. While the market here is just getting started, around the world, industry analysts expect there to be $30 billion in secondary transactions this year, more than triple the amount two years ago. Tucked away behind the bustling central business district of Hong Kong is a new building with no name, the number "8" being the only identifying sign.
On the 26th floor, in a freshly painted office, NewQuest Capital Partners looks and feels like a startup, even though it is made up of a team of veteran industry professionals. "Not many people know about this building," said Darren Massara, an American of Italian heritage and the former Asia head of private equity at Merrill Lynch, now the managing partner of NewQuest.
Not many people know the private equity market Massara plays in, either. Secondary market activity tends to grow when the primary private equity sector stalls, and requires new investors and managers to support the industry. NewQuest, with backing from HarbourVest, Paul Capital, LGT and Axiom Asia, was formed when Bank of America dumped Merrill Lynch's private equity arm after rescuing the brokerage in 2008. NewQuest now manages Merrill's former private equity portfolio. Newquest estimates that $200 billion of private equity capital invested in Asia since 2005 has yet to exit. With IPO markets shut and many Asia private equity funds fully invested and seeking new funds, the pressure is on both buyout firms and their committed investors - known as limited partners (LPs) - to show investment returns.
That is where the secondary firms come in. The firms specialise in buying these commitments from LPs that want to cash out of a private equity fund. Secondary firms assume that commitment and the ups and downs that can come with it, such as eventual profits from the sale of various holdings.
A strong run in the first half of last year saw private equity-backed Asia Pacific M&A hit its best figures since 2006 on volume of $33.2 billion, according to Thomson Reuters data. But fourth-quarter volume plunged 67 percent to $3.9 billion, the data shows, as equity and debt availability dried up in the second half amid global economic turbulence fed by Europe's debt crisis. In that economic turmoil, the struggles of private equity managers in the region grew, with sources pointing to India's private equity sector as a brewing trouble spot, where a lot of money was raised, with very little coming out.