Stay informed with free updates
Simply subscribe to myFT Digest Private Equity – delivered straight to your inbox.
The weak market for initial public offerings in Asia is prompting private equity investors in the region to pursue a controversial exit strategy: selling assets to so-called continuation funds that they raise themselves.
Five continuity funds closed in Asia last year, the most since 2010, according to data from Preqin, and dealmakers say interest in creating more vehicles is rising, especially in China.
“We have received many, many requests from Chinese players,” said Won Ha, the Singapore and South Korea head of French private equity firm Ardian, which recently invested in the infrastructure-focused DWS Continuation Fund.
Private equity firms face pressure to sell their holdings because they raise money from their investors for specific time periods, typically up to 10 years. To secure profits, they sell their holdings through IPOs or to other investors.
The IPO option is made more difficult by difficult market conditions in places like Hong Kong and China. “The equity markets, especially in Hong Kong and China, are very poor,” said a private equity manager who has been raising capital in Asia to create a single-asset continuation fund.
This article is taken from Nikkei Asia, a global magazine with a uniquely Asian perspective on politics, economics, business and international affairs. Our correspondents and external commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the largest and fastest-growing listed companies from 11 economies outside Japan.
Subscribe | Group subscriptions
The problem with continuity funds is that the companies involved are actually buyers and sellers of the same assets, which raises the question of how to arrive at fair prices for such transactions.
Private equity managers can defer recognition of losses by selling investments to a continuity fund rather than listing them on public markets, a senior deal adviser at a global advisory group said. Continuation funds typically last for seven years, dealmakers said.
“At best, there is the appearance of a conflict of interest. At worst, there is a real conflict of interest,” said Rodney Muse, managing partner at Malaysia-based Navis Capital, which in 2021 closed a $450 million continuity fund with investments in five companies. In 2022, it sold one such property, the TES battery recycling group, to South Korea's SK ecoplant for $1 billion.
To manage conflicts, Navis solicited offers for its assets from 50 institutional investors and used the best offers as the price for sales from its original fund to its continuation fund, Muse said. He added that investors in its original private funds, known as limited partners, had to live with the results.
“He was still an opponent, that's the harsh truth,” Musa said. “There's a lot of things to make sure that it doesn't tarnish your brand, and that you really take care of the brand [limited partners]”.
To increase the appeal of continuing funds, managers also tend to lower their fees and commit more capital than they would in a typical fund “so there is a strong alignment of interests,” said Jean-Philippe Schmitz, executive vice president at Ardian.
Hamilton Lane, a US private equity firm that has been a major investor in at least three Asian continuity funds totaling $830 million since 2020, said it has avoided being a buyer and seller of the same underlying assets, according to Mengxin Xia, co-president. From Asian investments. The three ongoing funds include two managed by China's Legend Capital Group and one managed by US-based L. Catterton.
A version of this article was first published by Nikkei Asia on February 27. ©2024 Nikkei Inc., all rights reserved.
