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“It’s Time For Secondary PE Deals In India”: NewQuest Capital Partners

20 May, 2011

NewQuest Capital Partners was created by a syndicate of limited partners – Paul Capital, HarbourVest Partners, LGT Capital Partners and Axiom Asia – which acquired the Bank of America Merrill Lynch’s non-real estate private equity portfolio in Asia. The newly established private equity manager – which is a spinout from Bank of America Merrill Lynch’s private equity arm – has a $400 million private equity fund, a portion of  which has been used to buy the bank’s assets, while the remaining amount will be used to make pan-Asian investments.

Thanks to the BoA Merrill Lynch PE, the newly established firm already has exposure to four companies in India – DRS Warehousing Pvt Ltd, a leading multi-modal logistics company; Vestas RRB Ltd, a wind turbine manufacturer and two undisclosed investments including an embedded software & systems design company and a leading manufacturer of complex fertilisers. In an interview with VCCircle, Darren Massara, Managing Partner, and Amit Gupta, Chief Operating Officer, NewQuest Capital Partners, talk about their investment strategy, allocation and expansion plans. According to Massara, they plan to commit up to $50 to $125 million in Asia within the next 6-18 months and they will only buy secondary PE interests.

What is the price you paid to buy the assets of Bank of America?

Darren Massara: Unfortunately, we are not allowed to disclose the price. If you want to know the price, you can ask the bank yourself. We did put together commitments of $400 million and somewhere in that range is the price paid to the bank. We also have a substantial amount left for new investments. So, it’s a hidden price.

So, what is the total capital you are sitting on to make new investments?

Massara: If I tell you that, I will indirectly disclose the price of the portfolio. Our goal is to invest around $50-$125 million in Asia within the next 6-18 months. We have put together a pipeline of strategies and our LPs are quite supportive of getting into this region generally.

How much will be the India allocation from that amount?

Massara: The whole fund is pan-Asian and India is one of the focus markets. About 40 per cent of the portfolio is in China, 30 per cent is in India and the rest is spread across the rest of Asia. While we don’t have a stated focus, there is definitely an emphasis on the growing markets of India and China. That’s where experience is, that’s where current portfolio is and that’s where we expect the deal flow to come from in near future. India represents a third of our portfolio today and we have got investments across Korea, Japan, Singapore and China. But India is a key focus and will continue to be so.

We hear that a lot of private equity reaction is moving eastwards. What will be your pecking order within Asia?

Massara: Our strategy is quite unique. Our deal flow will essentially come from places where a lot of activities had already happened over the past few years. Our model is to work with existing investors and provide them some liquidity.In different markets, there have been sectors which have been overbought. A lot of PE players have gone to sub-sectors and provided a lot of primary capital to these companies. But they now find that there is a lot of competition in these sectors and the companies they have backed, are not doing as well as expected.

So the exit horizons have been extended. Moreover, many investors have their own internal issues.So, you have existing investors who are looking to sell and monetise their positions in some way or the other. Some are even looking to sell out even at a discount to their initial principal. They just feel that they want to exit now. Other investors are saying that we have a good company, we want to earn a little bit of return but we don’t want to sit on the investment for 4-5 years to achieve an exit.

There are not too many private equity players or buyers in the market who are willing (or who have the ability) to hold discussions with those investors who want to sell. It’s mainly because no one has focused on that part of the market and it is a little niche.

We have managed 75 secondary deals like the ones we have now and like the ones that we are going after. And we have exited from 35 of them already. So, we know what it is like to be a seller who wants to sell some of his assets. It requires a specific type of discussion with the seller and we feel that we have been in the shoes of the seller.

We now know how to hold these discussions. So, we think we are well-placed to go after those opportunities because that’s where there is significant value.If you look at the rest of the markets, just being another provider of growth capital private equity really doesn’t seem to be a high value proposition for our limited partners.

We want to focus on that part of market because we think it is largely untapped; there is a lot of hidden value there and we do have a unique set of skills and expertise to execute those transactions. Even if those transactions are difficult, we are not afraid. But even in good situations, a motivated seller may want to exit for several reasons and we can handle it.

So basically, you want to buy secondary private equity interests?

Massara: Yes, precisely so. It is very basic. In any private equity transaction, you can buy two types of shares – new shares of the company or shares which someone already owns.

Simply put, we want to buy shares which someone already owns. I think we will mostly buy shares from existing financial investors. In rare cases, we may buy it from the promoter, but that will be only on special occasions.

We will look at either single asset deals or we can have discussions with several investors like we had in the case of Bank of America Merrill Lynch. We can say: “Hey, you have five portfolio companies; maybe you want to sell three.” So, we can do a portfolio deal as well, to provide liquidity situation to that particular investor and it often proves to be a win-win situation.

Doesn’t private equity, the virtue of the asset class that it is, provide locked-in capital for 7-8 years? Why do we need secondary PE in a growth market like India?

Massara: Luckily, for us, we have a lot of experience in this particular part of the market. We have managed 75 secondary investments, and exited half of them at a fair value. So, we think we have the expertise in these kinds of situations. Certainly, there is risk in this strategy. But there is also risk in providing primary growth capital to companies. Do you know if you give a company $30 million, it will grow three times in next 5-7 years?

In a typical PE deal, you have 10-15 firms running around and essentially running a mini auction for these news shares. They are all fighting and overpaying for that particular kind of deal. So, that model of another ‘me-too’ private equity firm in the market does not create much value for our investors.

You are right to say that there are PE guys who have the capabilities to stay put in an asset for a very long time. But there are a lot of investors out there who have gone into the private equity class without really understanding what they are getting into. Hedge funds, investment banks, corporate offices, and high net worth individuals – all of them have been investing in PE deals although they don’t have the longer-term mandate to invest. Those are probably the motivated sellers today.

That’s not where the source of our value creation comes from. It comes from providing liquidity to investors which makes sense for them and also to us and our LPs. We also look at the companies. They must have good management, good partners and they should be in a space which will grow in the next 5-7 years. I think that’s the standard model which everyone is looking at in the market. The only difference is that, we are not doing it with new shares; we are doing it with old shares.

Amit Gupta: Another couple of things we want to highlight are – it is a very established model in Europe, the USA and other mature PE markets. In Europe, about 40-50 per cent of exits actually happen through secondary sales and in the USA, about a third of the exits happen through secondary sales. Of course, we are not saying that every time you have to buy it at a discount. It is essentially like buying primary asset at a fair market value. In fact, it is another form of exit for PE players. In some cases, it can be at significant premiums to the price paid around the last time. In my mind, it is also a better-known kind of devil, as there is an investor who has been sitting on the asset for some time.

Would you be active or passive in your dealings?

Massara: It depends upon the kind of positions. By and large, we would like to be more active and add value in some form or the other because that’s where the PE alpha really comes in. But there will be some interesting passive positions out there.

What would be the ticket size of your investments?

Massara: As far as our current pipeline, we are seeing deals as small as $5 million and up to $25 million on the single asset side. On a portfolio basis, we are seeing them as low as $20 million and as high as $100 million. We are used to dealing across a broad range of investments, both active and passive kind of investments, and different instrument types – PIPES, convertible debentures, shares or securities.

Do you have any sectoral preference?

Massara: In terms of the sectors in India, there are a few which have really been overbought and that’s where most of our pipeline is coming from.

Gupta: In India, specifically, we expect a lot of deals from the TMT sector and a few in financial services. There will be a lot of opportunities in the real estate sector but we will be able to address only a few of those.

Why would anyone want to sell anything that’s profitable? Can you give us some insight into the characteristics of these sellers?

Massara: A lot of LPs whom I know see India as an expensive market. Coupled with that, a lot of PE investors have not realised as many exits as they would like. That may motivate PE investors to show their LPs a few exits before they start their second or third round of fundraising. I am specifically talking about mid-market private equity funds.

At times, a few investors lose the sector preference and they want to get out of a particular company for various reasons. That, too, drives some of the private equity players to exit. And then, there are people who actually went into this illiquid asset class in 2007 or the first half of 2008. They didn’t realise the risk at that time or understand the time horizon. They looked at it as a pre-IPO situation and that they would exit in 18-24 months. But given the IPO market has not been so kind, even those investors would be looking to exit.

Finally, how did you approach the Bank of America Merrill Lynch acquisition?

Massara: I think this is the transaction which was good for all three parties. Because, you had a bank which wanted to monetise its portfolio – some of those deals go back a number of years. As a team, it was a good deal for us because we wanted to go out and create a platform, raise third-party money and invest according to a strategy which we think is a bit unique for the region.

It was a good deal for our investors because they were looking to back a portfolio and a team which can create value for them going forward. It was a complicated deal which took us a long time and we are all happy with the results.


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Anonymous . 6 years ago

There are a very major problems with your approach:

— Since you are not a local on-the-ground firm in India, you are obviously unaware of the difficulty of buying assets from PE firms. You will almost never get a good deal if you are negotiating directly with PE funds in India. Your strategy, thus, has severe execution risks.

— You have to add a different kind of value to the companies to get exits where the first fund could not. This is also not clear in your strategy. You are not clearly addressing your management of companies as a GP, but rather addressing pricing alone. Pricing alone will not get you a good return.

— You fail in addressing the cultural aspects of India. Why would a promoter respect you as a someone who has “swapped” an existing investor? Alignment with promoters is the only success strategy in Indian PE. You have not addressed that.

— You say you have exited 35 of the 75 secondary deals you have done. Any how many were in India? India is a totally different beast and requires a completely focused strategy.

Getting capital to buy a pool of assets is not difficult. Using the BOA/ML pedigree to raise money is also not very challenging. The issue is execution. Wish you best of luck.

Francois . 6 years ago

It would have been interested to read why they are more interested in secondary than in series B investment. When you are interested in an already successful company, series B is also an interesting option.

Anonymous . 6 years ago

let me start from a very basic question to very vocal Darren and he-too-spoke-when-he-realised-he-wasn’t Amit.

Is your whole concept of a private equity investment – a hedge fund or a public market investment-like play? Because all I see is the focus on the “lower” entry price than the previous noob without a fundamental analysis as to how good really is the underlying asset.

I wonder if the expectation of 3-5X on the entry price is really viable when the effort is 100% on negotiations with LPs to get into a historically bad investment rather than indentifying a potential gem, understanding and non-intrusive handholding the investee company to attain a higher-growth-path.

I heard someone talk about deriving comfort from a known-devil. Yeah right. The smart fellows who could not figure the right investment from wrong investment at round 1 of investments shall now look at the prospects of some-one smarter give them an exit. But hey, the underlying asset is still same – which was never evaluated on stand alone basis in terms of what were the reasons it did not give the expected returns to round 1 investors.

Hats off boys.

Anon . 6 years ago

Above points are relevant. I suspect both Indian and Chinese markets are complex.

“Our strategy is quite unique. Our deal flow will essentially come from places where a lot of activities had already happened over the past few years. Our model is to work with existing investors and provide them some liquidity”- The article does not bring out clarity as to what is the fund strategy. Secondary PE deals sounds more like a classification / definition than strategy.

Jay . 6 years ago

The comments were more enlightening than the interview 🙂

“It’s Time For Secondary PE Deals In India”: NewQuest Capital Partners

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