Roll over: Asia GPs increasingly mull continuation funds as alternative exit option

Data Insight Dealspeak 27 September

Roll over: Asia GPs increasingly mull continuation funds as alternative exit option

By and Manu Rajput

With the IPO market almost shut and trade sales facing lingering challenges, APAC general partners (GPs) are increasingly viewing continuation funds as an alternative exit option to rolling over existing portfolio assets.

According to Mergermarket data, private-equity (PE) exit deals across Asia-Pacific in 2023 year-to-date (YTD) have declined to 14-year lows in both volume and deal count. The region has recorded 91 deals totaling USD 16.3bn this year, with deal volume representing only 15% of the record for the same period in 2022.

It makes sense to postpone exits as the best valuations may not be achieved in the present climate and with current funds coming to an end, GPs would rather roll over to a new fund, opined a Hong Kong-based PE dealmaker.

“If I know earnings could double or triple in the next two or three years, why would I sell now?” he said.

Great minds think alike

GP-led secondaries used to be regarded as a last resort for PE firms that were unable to raise new funds. Now, they are increasingly seen as valid liquidity solutions. Continuation funds for a single asset are typically limited to the most promising assets - incoming investors must see sufficient upside to take on the concentration risk, as opposed to backing a diversified portfolio of assets and perhaps even paying a premium to net asset value for the right to participate.

A Sydney-based PE advisor maintained that investors are more likely to hold assets for longer because it is harder to find good-quality assets elsewhere. Rather than entering a ‘blind fund’, limited partners (LPs) often prefer to invest in a continuation fund because the assets have been de-risked and tested.

A Seoul-based PE investor agreed and anticipated increased interest from buyout firms, backed by international LPs, following recent precedents in Korea. Some LPs are not fond of this approach, which could impact other commitments, but GPs can earn more time for sizeable assets with upside potential, said the investor.

Investment banks are also drumming up interest in continuation funds as they seek advisory opportunities in the subdued M&A market, added the Hong Kong-based PE dealmaker. He said that his firm regularly gets pitches from bankers and reviews continuation funds for portfolio assets.

Pipeline filling up

There have been nine single-asset continuation fund deals since 2018, across Australia/New Zealand, South Korea, India, and China, while Southeast Asia and Japan have had no deals, according to this news service.

Australia/New Zealand has been the most active region in APAC with five deals, including Pacific Equity Partners (PEP) last year rolling over its 50% stake in smart metering business Intellihub, originally under Secure Assets Fund I, into a single-asset continuation fund, namely Smart Metering Fund, backed by GIC.

This year, PEP has again raised a single-asset continuation fund, this time of around AUD 400m (USD 268m), for Up Education, a vocational education business it has held since 2015, while Quadrant Private Equity sold its automotive business, MotorOne, into a new single-asset continuation fund backed by ROC Partners and Future Fund.

Among possible deals to come is Crescent Capital Partners’ healthcare-staffing business, Healthcare Australia, which sources say is close to forming a continuation fund.