Asia will be the biggest source of growth for new investment in private markets over the next five years, according to a detailed survey by alternatives data specialist Preqin.

Taking input from 300 fund managers globally and more than 120 institutional investors in June this year, the report -- “The Future of Alternatives” -- assesses the likely size, shape and make-up of the global alternative assets industry (private capital plus hedge funds) in 2023.

At that time, global assets under management in alternatives will be 60% greater at $14 trillion, Mark O’Hare, Preqin’s chief executive officer, said.

Asia’s growth as a source of investment capital will be a major factor, easily outpacing the expected rate of expansion in North America, Europe and even other emerging markets (see chart below).

Fund managers surveyed predicted that by 2023 the level of alternative assets capital will have increased by 40% in China, 14% in India and 23% for other Asian emerging markets.

“The Chinese venture capital industry already matches that of the US in size,” O’Hare said. “Further emerging markets growth will be a ‘double whammy’ of GDP growth and higher penetration of alternative assets.”

Gianluca D’Angelo, head of EMEA with Eaton Partners, cited the emergence of Asia as a source of long-term and scalable capital for closed-end funds. 

"Increasingly, we are seeing managers incorporating Asia into their pre-marketing roadshows to develop relationships and build their footprints," he said in the report. "The benefit of investing time in Asia well in advance of a fundraise can result in the payoff of securing a material amount of capital from the region."

He added that institutional investors in Japan, in particular, were beginning to make significant investments in private markets in their quest for income after years of ultra-low domestic interest rates.

"With other countries with powerful investor bases like Korea and emerging players like Taiwan and Malaysia, we expect Asia to continue increasing its share of global capital concentration over the next five years,” D’Angelo said.

Some major asset owners, like Korea’s National Pension Service (NPS), are arguably already veterans at it, having invested in private equity for over 10 years. Hyung-Don Choe, head of the NPS global alternatives division, said in the report that the NPS private markets portfolio is already maturing.

“Like other large limited partners, NPS has a similar level of distributions and capital calls, and therefore we must make large, new commitments every year ($5-6 billion) to increase assets," Choe said. "However, due to the nature of Korean public pensions, there are many restrictions that we face in various areas, such as manpower.”

To overcome these constraints Choe said NPS has been forming various strategic partnerships with large private equity firms, which has provided it with co-investment opportunities and reduced fees.

“We are also actively seeking mid-cap opportunities through our overseas offices. We work with fund of funds managers to invest with emerging managers and small-cap managers, which we are not able to cover due to the limited resources in manpower,” he said.

Investors and fund managers alike see an increasing role for co-investments, separate accounts, direct investments by limited partners and other structures. The Preqin survey also suggests Environmental, social and governance (ESG) will be a strong influence and become much more mainstream as investors’ expectations grow.

Private funds have shown continued market outperformance for many years. Preqin estimates that buyout funds globally have outperformed the S&P 500 (price return) index by 5% per annum since 2000. For private capital funds of vintage 2008 and onwards, the net IRRs since inception have, on average, exceeded 10%.

“As such, many investors have been increasing their allocations to the asset class or setting up an allocation to the asset class for the first time – I expect this trend to continue,” Michael Murphy, managing director and co-head of the private funds group at Credit Suisse, said in the report.

While the private equity and hedge fund industries currently represent a combined 75% of the $8.8 trillion alternative assets industry, this share is expected to decrease over the next five years, as other alternative asset classes grow at a faster rate.

For example, the private debt market is predicted to double in size, reaching $1.4 trillion in 2023, overtaking real estate to become the third-largest alternatives industry.

The real assets universe is predicted to be the fastest-growing area of alternatives over the next five years, driven by natural resources. Real assets are expected to represent 13% of the $14 trillion alternatives industry by 2023, one and a half times the current size.

"In terms of the alternative asset landscape, the last five years have seen a slow but steady development in Asia, from growth investing to buyout investing, mirroring the development of economies in the region," Murphy at Credit Suisse said. "I believe this trend will likely continue and that experienced, independent private equity firms in the region with a track record of successful buyout investments and exits will see particular interest from investors and success going forward."