Institutions emerging into a post-Covid landscape in Asia are pushing asset allocation towards private markets as they chase better risk-adjusted returns from these relatively illiquid assets, according to industry experts.
A recent report confirms that trend, noting that Southeast Asian asset owners are in particular are keen to increase their private markets exposure.
Cerulli has noted from research interviews that asset owners either have already increased or are looking into increasing allocations into private market investments with the conviction that these assets offer better risk-adjusted returns.
“While such assets tend to be more illiquid, asset owners prefer to accept the higher levels of illiquidity in return for better performance over the longer term, as they are attracted by the impact on volatility as well as the illiquidity premium,” said Lee.
There is a great deal of dry powder in private equity, in Southeast Asia and worldwide, and managers are still raising capital.
Malaysian institutions Employees Provident Fund, Kumpulan Wang Persaraan, and Khazanah are among the Southeast Asian asset owners that have indicated interest in private equity, according to the report.
“There are expectations that the funds are likely to be put to work as investor sentiment turns optimistic,” said Lee.
INFRASTRUCTURE AND PRIVATE CREDIT
Infrastructure remains a popular portfolio allocation among asset owners, as it is still considered a hedge against inflation, according to Lee.
“However, asset owners also noted the intense competition for quality assets in Southeast Asia due to the limited number of projects and opportunities,” he said.
The Philippines’ two large pension funds, Government Service Insurance System and Social Security System (SSS) are among asset owners in the region that have indicated interest in allocating more to infrastructure projects.
Additionally, many institutions are also showing interest in private credit.
“Managers interviewed have said that in private credit, they are able to improve the structural protection on the bonds and loans they invest in, and therefore are in a better position if there is a credit issue to deal with than if they were in public high yield,” said Lee.
Most asset owners surveyed by Cerulli increased their portfolio allocations into real estate from 2021, with the majority indicating their intentions to either maintain or increase allocations. Some also cited the high interest and inflationary environment as the main reasons for diversifying into an asset class in which they had no previous exposure.
While the pursuit of private market assets might provide opportunities for fund managers, these will vary according to institution.
“For example, the SSS has no exposure to infrastructure, while GIC has separate teams for private equity, infrastructure, and real estate, and invests directly as well as through funds,” he said.
ERA OF NEW OPPORTUNITIES
Accompanying this drift towards private markets is a strong technological shift that is creating strong investment cases for India and China.
According to Bill Maldonado, chief investment officer and interim chief executive officer at Eastspring Investments, Asia’s next transformation will be different from the last.
“The next transformation will be more innovative, more technologically advanced, higher value-added and greener," Maldonado told AsianInvestor.
"This will present opportunities for investors in both traditional and new sectors, which can potentially translate into more sustainable and attractive earnings growth and therefore returns,”
Asia is well positioned for the next decade. Its manufacturing expertise will benefit from supply chain rebalancing, he said.
Asia’s leading companies within the electric vehicle supply chain and renewable energy sector will also benefit from the global transition to net zero, said Maldonado citing his firm’s recent whitepaper “Asia 2.0: Investing in an era of new opportunities”, published in collaboration with PwC Singapore.
A majority of respondents (67%) in the report consider India to hold the most potential as businesses seek to expand and develop within Asia, closely followed by China (57%) and Indonesia (38%).
“The large percentage of business leaders who are still positive on China suggests that business realities are different from political realities. Companies and investors are still looking to invest in China,” said Maldonado.
“China is already a current leader in renewable energy and its share is expected to increase, with solar and wind energy playing a major role. There are opportunities within the solar value chain, boosted by China’s manufacturing expertise and cost competitiveness,” he said.
Meanwhile China’s healthcare sector will benefit from China’s ageing population and increased demand for healthcare services. In particular, the medical device players are expected to enjoy strong growth while China’s goal for self-sufficiency will help support the pharmaceutical sector.
“As for India, rising mobile penetration and digital adoption will create opportunities for the telecom infrastructure companies and e-commerce players. Rising energy demand and the government’s strong support would also further growth in India’s renewable energy sector,” said Maldonado.