NewQuest Capital rides on secondary deals

Secondary specialist, which has invested in over 20 deals across Asia, is getting more active in India

New Quest Capital Partners, the Hong Kong-based secondary specialist, is getting aggressive in India. It is in talks to buy the India portfolio of US-based venture fund New Enterprise Associates (NEA). The panAsia firm, in which TPG Capital had invested earlier this year, is also in talks with IDG Ventures to buy out four firms from its first fund. New Quest refused to comment on specific deals.

NewQuest, which has been deploying $250 million a year across Asia and $150 million a year in India, will invest $400 million in the country this year. In all, it has done around 10 transactions in India, buying firms individually or as a portfolio from other private equity (PE) investors. In some cases, it comes in as an investor in PE firms, replacing another.

“We expect to see more secondary market opportunities in India. As the PE and VC market in India matures, the secondary market opportunity will increase accordingly. India funds also have a long tail, best addressed through innovative secondary transactions,” says Amit Gupta, founding partner of NewQuest Capital Partners.

When PEs take minority stakes, they expect to exit a firm through an IPO or a strategic sale. In many markets such as India, it can take longer for a firm to mature and do an IPO. But most VC or PE funds have a life of 10 years by the end of which they need to return the capital to investors. Secondary deals provide an alternate source of liquidity.

For instance, many PE-backed firms, who had planned their IPOs this year, had to defer them in view of the market correction. Similarly, between 2011 and 2014, there were few IPOs. When that happens, companies and investors start looking at alternate sources of liquidity.

“Limited Partners (LPs, investors in PE firms) have a 10-year window on investments. Liquidity events such as Walmart are fewer and fund managers (general partners) feel that they need to take some money off the table every three-four years,” a fund manager said.

The opportunity

In 2011, Gupta founded NewQuest Capital with three others when they spun out from Bank of AmericaMerrill Lynch’s Asian PE business to focus on secondary deals in Asia. The opportunity: most PE/VC funds that had raised money between 2000 and 2007 in Asia had deployed the same by 2011 and were looking at alternate forms of liquidity, as a result of a slowdown in capital markets.

Most of the funds from the 2006-07 vintage have been around for 10-12 years, and many have received extensions. At some point, LPs have to exit. “Over the next 2-3 years, we are going to see many end-of-fund life transactions in Asia,” says Gupta.

While there’s growth in Asia, it takes longer for companies to be large enough to list or be of strategic interest. As such, companies in Asia will have to change hands a few times before they are ready for an IPO or a sale.

Previously, companies would raise money and IPO in three years; now this can take ten years. Investors don’t want to hold them for more than 5-7 years. The business

NewQuest specialises in providing alternative liquidity solutions to private equity asset owners on a direct and indirect basis. It acquires private equity positions directly through portfolio and single asset transactions and can also partner with incumbent managers to provide liquidity to limited partners. Sometimes, a general partner may need a few more years to maximise the value of a portfolio while an existing LP may not be able to hold on for that long. In these situations, NewQuest would partner with the general partner to restructure these funds and leverage the incumbent partner’s knowledge and relationships to maximise value of the underlying portfolio.

VC firm Lightbox, which bought the India portfolio of two PE firms and then raised a fund, followed a similar path. NewQuest, now investing through its third $540-million fund, typically targets more complex fund restructuring transactions and would sometimes work with other large LPs to restructure funds.

Secondary deals can take place at the asset level where a secondary player directly acquires an asset or a basket of assets from a PE investor. Sometimes, secondary deals can take place at an LP level. For instance, a PE firm, with say 10 investments, has exited five but its fund life has come to an end; it hopes to make meaningful returns on the remaining five if it can hold them for another three years. In this case, a secondary player can partner with the incumbent general partner to restructure the fund.

While PE investments in Asia has been growing, the distribution has not kept pace with investments. In the US, for every $1 invested in a year, PEs are able to return $2 to their investors. In Asia, for every $4-5 of new investments, only $1 has been returned, which means these businesses need more time and capital to grow. For minority investors, liquidity expectations were driven by capital markets. But when IPOs don’t happen, there’s a need for alternate sources of liquidity. That may change as more buyouts happen, and PE firms and investee firms will be less dependent on capital market for exits.

Other players in the secondaries space in India include TR Capital (Asia and tech-focused), Partners Group, Lexington, HarbourVest, among others. Few have some sort of solutions business but a big part of their strategy is buying passive LP stakes.

The returns

NewQuest Capital has raised $1.3 billion from three funds and made over 20 transactions across Asia, including 10 in India. It focuses on China, India and Southeast Asia. It has raised three funds: $390 million in 2011, $310 million in 2013 and $540 million in 2016. It has exceeded its targeted returns for fund 1, returned significant capital in fund 2 and will start harvesting exits from fund 3 from next year.

Typically, NewQuest targets to deliver an overall return in excess of 2x. PE firms target 25 per cent IRR and 2.5x multiple from its deals. In secondary deals, the investment cycle tends to be shorter at 3-4 years than typical PE firm. Similarly, the fund cycle is shorter at 8 years versus 10 years for PE firms.