On secondaries
Bee Alternatives, a Japanese pioneer in private equity secondaries in Southeast Asia with a Labuan fund manager license, was a breadth of fresh air in the local private markets scene. What are secondaries, you ask? Before we continue, this topic interests mainly private equity fund managers and limited partners; feel free to skip this post if you are neither. 🙂
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LP-led secondaries
The best way to understand secondaries is to start from the perspective of a private equity fund investor, known as a limited partner (LP). An LP commits capital to a private equity fund for a period of ten to twelve years. The private equity fund manager, known as a general partner (GP) has five to six years to invest the funds into promising businesses and then a further five to six years to sell these businesses for a profit (hopefully!) and distribute the proceeds back to their LPs.
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Unlike owning stocks on public markets, where one can choose to liquidate one’s stake for cash under most circumstances, an LP traditionally has difficulties liquidating their stake in a PE fund mid-way through the fund life. There are many reasons why an LP wants to liquidate its PE portfolio mid-way (a discussion for another day). The secondary market was developed to address this. Sophisticated buyers can value LP stakes in one or more unlisted businesses and provide LP ‘liquidity’ when needed.
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The scenario described above is an LP-led secondary, the most common form of secondary.
GP-led secondaries
The second scenario is when a private equity fund comes to the end of its fund life without exiting all its investments. There could be multiple reasons why a GP is not able to sell all its investments after ten to twelve years (a discussion for another day). The traditional consequence usually has two outcomes: 1. the LPs begrudgingly extend the fund life, or 2. the fund distributes its stake in private companies for LPs for direct management.
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A GP-led secondary is where a GP initiates a restructuring or liquidity event for its LP, typically selling its stake to a ‘continuation fund’ where a secondary investor agrees to participate, alongside existing LPs who agree to ‘roll over’ their stake to this new fund vehicle.
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Now that we understand what a secondary is, you will agree with me that the presence of Bee Alternatives and other PE investors specialising in secondaries is important for the development of private markets in Southeast Asia. Anecdotally, several secondary transactions have been completed over the past year or two in Malaysia.