Hong Kong-based PE firm Affinity halts continuation fund plan

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Hong Kong-based Affinity Equity Partners has paused plans to launch a so-called continuation fund enabling itself and its investors to sell down their shares in companies because of unfavourable market conditions, said two people with knowledge of the matter.

A continuation fund is a new investment vehicle created by a private equity (PE) firm to transfer holdings of some existing investments. The concept has gained traction in Asia in recent years as PE firms’ exit from companies via initial public offerings (IPOs) or mergers and acquisitions became challenging.

The assets involved in Affinity’s plan included Burger King’s operations in South Korea and Japan as well as South Korean purchasing management business ServeOne, said the people, who could not be named because they were not authorised to speak with media.

Affinity had been discussing fundraising plans for the continuation fund with advisers and potential investors, the people said.

Affinity did not respond to a request for comment.

The pausing of its continuation fund plan highlights fewer options for PE firms to exit their investments in companies amid an economic slowdown and higher interest rates that have eaten into asset valuations and resulted in increased funding costs.

The PE firm had attempted to sell Burger King’s South Korea and Japan operations last year, aiming to fetch more than $1 billion, Reuters reported at the time. That process failed to yield a result.

Affinity had bought a majority stake ServeOne in 2019 for $535 million.

In total, Asia-focused Affinity has $14 billion of assets under management and 58 investments in 11 countries, according to its website. The target size of the planned continuation fund was not clear.

An increasing number of PE firms have been weighing the continuation option in a bid to hold on to an asset beyond a fund’s maturity, as asset sales or IPOs for many have become financially unviable.

There has been 182 PE exits worth $28.8 billion in Asia this year, down 2.7% year-on-year in deal value and only half of the 2021 annual value, Preqin data showed. In 2022, 196 exits compared to the annual average of 232 deals in the past decade.

Data on continuation funds are scarce but since 2018, at least $4.7 billion was raised in Asia by such vehicles, Preqin calculations showed, with the majority closed in the last two years.

Exit Headwinds

Affinity is ready to launch the fund whenever market conditions improve, one of the people said.

Despite the near-term challenges, deal advisers are hopeful continuation vehicles will remain as a viable option for PE firms in the region.

Given the exit headwinds, such vehicles offer a potential solution to fund managers for their larger, higher-quality assets that still have strong growth prospects, said Sanjeev Malkani, JPMorgan head of Asia Pacific sponsor M&A.

Dennis Kwan, managing director, private capital advisory at Jefferies, said deals in Asia are generally smaller and many investors perceive the region as riskier than other markets given the exit environment and economic challenges in emerging markets.

“Hence, multi-asset continuation funds helps to mitigate part of the concern by creating a more diversified portfolio,” he said.

Potential new deals of this type include Chinese PE firm Trustar Capital’s plan to raise a continuation fund for its stake in McDonald’s China that would value it at $10 billion, Reuters reported in August.

Primavera Capital Group is also considering launching a continuation fund for a number of education portfolio companies, said a separate person familiar with the matter. A Primavera representative did not respond to a request for comment.

Reuters

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