“Our deal flow today is at its peak in terms of number of attractive opportunities we are working on.”

Philipp Gysler, Partners Group’s head of Asia, speaks to PEI Asia about the Swiss fund of funds manager’s view of the private equity secondary market.

What is the strategy for the current Partners Group secondary programme? 

Generally, we focus on managed portfolios, not unmanaged assets or individual companies. Our approach is value-based and manager-focused. We believe in backing quality managers because the continued value creation is important.

We like to invest at the inflexion point where assets are still in their value creation and that always takes skilled managers. So manager due diligence is an integral part of the overall secondary due diligence, besides the asset due diligence itself.

What is the program’s percentage allocation to Asian secondary fund positions likely to be?

The Partners Group Secondary Programme does not have an allocation to regions per se as the secondary business is opportunistic in nature. As a buyer, you try to source proprietary deals that offer good value creation potential at an attractive price and you are less concerned about reaching a certain allocation within a region than you would be in a primary mandate.

Also, historically secondary fund positions in Asia have been much fewer compared to the US or Europe, although more recently deal flow in Asia has picked up considerably. This is due to the growth in the size of the private equity market in Asia and the international penetration of the region over the last four to six years. If you look at who the sellers are today, it is often sellers who have invested globally. With all the global attention, the market grew to a peak size of more than $50 billion of funds raised in 2007.

The current Partners Group Secondary Program has seen some commitments from Asian LPs who have never invested in secondaries before. Why do you think more Asian LPs are becoming interested in secondaries?

What we are observing in Asia is that investors are starting to invest globally with strong appetite for secondaries in general. For example, Australia is a market where the institutional segment has historically been a very strong backer of the local private equity industry, but many of these institutions have only recently started to look at globalising their portfolios.

Earlier in the year, it appeared there were plenty of sellers, but buyers were holding off. Now it seems the reverse is true. How do you see the secondaries market, globally and in Asia?

When the financial crisis was very apparent and financial assets were distressed in terms of pricing in the credit market, the secondaries market, given its low visibility, was perceived by secondary sellers as facing a limited pocket of secondary purchasers.

In fact, if you look at the overall base, the deal flow in a given year such as 2009 is about $80 billion. The secondary investment capacity is somewhere around $20 billion, in terms of pools of capital that are purchasing secondary interests in a given year. There is an inherent imbalance and if you compare the heat of the financial crisis with now, it was definitely the case that several pure fire sales took place at that time, at abnormal, attractive conditions.

I expect the real volume to come over the next year, or even two years down the line. Today it is known that some large investors have to sell interests – sometimes in very interesting funds – and they can now do so in a more orderly setting and process.

If I look at our deal flow today, it is at its peak in terms of the number of attractive opportunities we are working on. A large part of this deal flow is from international global investors who are selling interests.

There seems to be two schools of thought on Asia. The first is that sellers tend to hang onto their Asian fund positions over positions in other markets, and the second is that sellers want to dispose of these positions first due to their unfamiliarity with the region. Which do you agree with?

We’ve seen both. Generally when an investor has to dispose of assets there are also other preferences such as they would like to dispose of undrawn commitments, which may become future liabilities. Also they would like to sell what has a lower quality to them. In that regard, there may be different perceptions.

The fact is in the market today, we see a lot of quality assets because only this type of assets will get and can get a price that makes sense. Investors are not paying for bad managers, or excessive risk. It may be that for one investor, asset allocation has an influence, in other cases it is unilateral – an investor has to dispose of the entire portfolio.

For our part, Partners Group has an appetite for Asian secondaries. We feel Asia is a very attractive opportunity, given the facts of the demographic developments, the underlying growth perspectives, and the financial and economic stability of the countries themselves.

On the counter side, managers are often younger and less experienced – there’s not a huge pool of managers that we would like to engage in secondaries with.