Despite speedbumps in Asia’s Covid-19 pandemic recovery, with renewed outbreaks and disproportionate vaccine rollouts, the region’s economic forecast looks promising. Countries of East Asia and the Pacific, including China, expect to post GDP growth of 7.7%, according to a new research paper by bfinance on Asian private markets.

Asset manager fundraising has recovered substantially in 2021 after taking a dramatic dip in 2020. Over 39% of asset owners believe that Asia Pacific now offers the best opportunities for private market investment, up from 26% in 2020, according to a recent survey by market research firm Preqin.

Investors’ total market exposure in Asia Pacific across private markets has grown over 600% over the past decade to approximately $2.2 trillion, representing 15% of the global total.

Recent years have also brought a run of superior returns for APAC private markets strategies relative to their North American or European counterparts.

Since January 2020, Pan-Asian open-ended funds have outperformed their US equivalents. US core open-end funds have delivered slightly less than 7% for the 18 months to June 30, 2021, while Asia core open-end funds tracked by bfinance have generated a return of 11% over the same period.

The paper also highlighted growing opportunities in private equity and infrastructure in APAC private markets.

PRIVATE EQUITY BUYOUTS GAIN TRACTION

Private equity is often the primary focus for new investors in APAC, as it represents the single largest asset class in the region with approximately $2 trillion in assets under management.

Venture capital has historically held a disproportionally large share of Asia’s private equity market, which is still true today, with venture capital representing 44% of private equity assets under management in Asia relative to 16% globally, according to Preqin.

Anna Morrison,
bfinance

However, the growth and buyout segments are gaining traction, according to Anna Morrison, senior director, private equity for bfinance.

“In particular, we see significant growth in buyout opportunities in China and India, partly because of maturing capital markets and partly because of regulatory changes that are facilitating a structural shift in ownership patterns,” said Morrison.

“Previously general partners were held to minority stakes, which favoured growth and venture capital but external investors can now take majority stakes.

“By comparison, Japan and South Korea, have always been buyout markets, given the maturity of their capital markets and the nature of their corporate conglomerates,” she said.

Investors can use a range of different strategies to access growth or buyout opportunities, including pan-Asian funds - which can range from the very large (KKR recently closed a $14 billion buyout fund) to the very small (less than $2 billion) - and country-specific funds, which may only raise a few hundred million dollars, said Morrison.

APAC INFRASTRUCTURE THE NEXT FRONTIER

Infrastructure in Asia experienced a strong fundraising year in 2020 of $14 billion, compared with other asset classes.

According to the Asia Development Bank (ADB), $26 trillion of expenditure will be required to finance  APAC’s future infrastructure plans, maintain economic growth momentum and adapt to climate change. In the period from 2016 to 2020, the infrastructure investment gap for the region was estimated at 5% of GDP excluding China.

The research by bfinance showed a growing use of public-private partnerships to finance infrastructure projects as governments across Asia have recognised that public funding may not be sufficient for their infrastructure needs.

Anish Butani,
bfinance

“Excluding Australia, the Asia Pacific region is often considered the next frontier for private infrastructure investment opportunities,” Anish Butani, senior director of infrastructure at bfinance, said in the research paper.

To date, only a handful of large asset owners have targeted opportunities in the region, with the broader institutional market still in its infancy.

There are signs, however, of growing appetite amongst managers, as a handful of regional funds emerge and global players increase their presence in the region, said Butani.

“The nascent state of the market arguably presents an outsized opportunity to generate attractive risk-adjusted returns in core infrastructure (toll roads, utilities, etc.), which are largely privatized in developed markets, where investors face much fiercer competition for assets,” he said.