Asian private equity is set to see a boost in allocations from North America and Europe in the next few years as institutions shift investments away from slow-recovering economies in the West.
According to a survey by Coller Capital, limited partners in Europe – which is heading towards recession – represent the biggest upswing, with 39% planning to have at least one-tenth of their PE portfolio invested in Asia within three years, from 15% with that level of exposure now.
Similarly, 39% of North American LPs intend to have no less than a tenth of their PE exposure in Asia by 2015 – nearly double the 21% that do so already.
The proportion is significantly greater for Asian LPs, 89% of which plan to have more than one-tenth of their PE exposure to the region within three years, from the 63% with that level now, finds the Global Private Equity Barometer by UK-based Coller, a PE firm specialising in the secondaries market with $8 billion in AUM.
The desire for greater Asian PE exposure is in line with investor optimism for the region, in contrast with dampened sentiment towards the West.
Australia is seen as the most attractive market for buyout deals, as indicated by about 39% of LPs across all regions, followed by China with 30%. Indonesia and India were deemed as appealing by about 25% of investors.
Conversely, LPs have cast a bearish economic view on North America and Europe, with just under 80% expecting a slow recovery in the former over the next 12-18 months, and about 60% foreseeing a slow upturn or deteriorating conditions in the latter.
The report, which is based on a poll of 101 LPs in PE funds in North America, Europe and Asia, shows rising involvement in two areas that were once considered niche for institutions: distressed debt and direct investment into companies that bypass traditional PE channels.
Two-thirds of investors now make direct investments into private companies, up from 35% in 2006. The figure includes LPs that invest on a standalone basis and also through co-investments alongside a private equity firm.
A movement by institutions to acquire and hold assets – as opposed to investing in PE funds that do so – is growing strongly in Asia, where pensions and sovereign wealth funds have been bidding for assets in competition with PE firms. The trend is set to grow, with 42% of LPs planning to increase their direct investment activity over the next three years.
Another trend on the rise among investors in Asia is for LPs to hold investments in distressed debt funds. As many as 65% of those polled now hold distressed debt funds, up from about 45% in 2008 and in contrast with peers in Europe and North America, where 35% and 65%, respectively, hold distressed debt funds and that has remained static for the past four years. Returns appear to be the main drawcard for the distressed asset class, with 89% expecting medium-term net returns of more than 11%.
While private equity is gradually becoming a mainstream asset class, its public image could use some polishing, say investors, 45% of whom believe it has a bad reputation generally. Asian LPs are divided as to whether it is deserved or not, with 50% taking either side of the argument.
There is slightly more sympathy among North American and European LPs, with 68% and 62% respectively believing that public perception of private equity is worse than it deserves.