China’s secondary private equity market gains favour amid low valuations, exits

Global investors are increasingly interested in gaining exposure to China through secondary private equity investments amid US-China tensions and a market slump that has squashed valuations, according to industry participants.

Buying and selling of pre-existing investor commitments to private equity and other alternative investment funds provides “diversified and more seasoned” exposure for global investors who want to access Asia, including China, according to Frederic Azemard, managing partner of secondary private equity investor TR Capital.

“We have a lot of global investors who see secondary [investments] as an excellent way to get risk-adjusted exposure to Asia,” said Azemard. By committing funds to secondary private equity investments, investors can achieve higher and faster liquidity turnover, because these investments typically mature quickly, he added.

Last year, secondary private equity transaction volume in China dropped 28 per cent year on year to 74 billion yuan (US$10.2 billion), partly because of a high base. Over a longer term, the market has experienced rapid growth, increasing by 53 per cent, 153 per cent and 39 per cent in 2022, 2021 and 2020, respectively, according to Chinese data provider Zerone.

“We have many investors, including well-known sovereign wealth funds, insurance companies and pension funds, who see us as an alternative way to participate in the growth market in Asia, because making primary investments in China, for example, might be difficult at the moment,” said Min Lin, a founding partner of TPG NewQuest, the secondary-market arm of the US private-equity giant TPG.

Cash-rich companies that previously raised handsome amounts at high valuations do not need funding, said Lin, who also co-heads the Greater China business. “In a market downturn, it is harder for valuations to come down in the primary market, whereas in the secondary market, we have seen reasonable, acceptable discounts,” she said.

British asset manager Schroders Capital also sees opportunities in the secondary market in China, with investors showing interest.