Asian institutions are starting to seek alternative investments in their home region, particularly in hedge funds and real estate, according to US fund house BlackRock.
“What we have been seeing over the last few months is a refocus – at least from the institutional investor base in Asia – back on Asia," says Joseph Pacini, Asia-Pacific head of the alternative investors strategy group.
Asian private equity has drawn interest from institutions from the region, “but maybe not quite as much” as Asian hedge funds – notably credit strategies – and real estate, he notes.
Pacini attributed renewed interest in the region to “recognition that there’s still growth in Asia”, rather than bearish views on North America and Europe.
This diverts slightly from the general trend seen among institutions globally last year: the “overwhelming desire” to invest in opportunities in North America. It is unsurprising, says Pacini, given the bull market which saw the S&P 500 gain 28% in 2013.
Another global trend is greater institutional interest in alternatives. “The low interest rate environment makes it tough for institutional investors,” says Pacini. “Investors are looking for yield in other areas [and] there is more interest to invest into alternatives for that purpose.”
About $119 billion of BlackRock's $4 trillion in assets under management is in alternatives and Asia accounts for roughly 20% of the alts AUM.
One area of interest is the private lending space in Asia, cited last year by KKR as an area for expansion. BlackRock has spent the past year looking at the market segment, which provides credit to Asian businesses as an alternative to raising money on the capital market.
“In Asia, generally speaking, the entrepreneurs and the families [that own businesses] don’t want to sell equity, just by nature,” says Pacini. It’s a way to participate in corporate growth through debt instruments and warrants, he adds.
“As an investor [you] have the ability to protect some of your downside because it can be underwritten by the family or the entrepreneur of the business. We’ve been spending a lot more time focused on that area, and we would say there definitely are opportunities.”
It is an area in Asia that is relatively new ground for global alternative firms, having been largely the domain of regional specialist managers such as SC Lowy, Olympus Capital Asia and ADM Capital. For global alternatives firms, it represents a way to expand fixed income activities in Asia.
BlackRock continues to view the region as “the growth engine of the world”, says Pacini. “The underlying GDP growth, growth of the consumer, growth of the middle class – that has still has overwhelmingly been coming from Asia.”