Asia’s asset owners favour private credit over equities
Asset owners in Asia are most likely to add exposure to private credit while their global institutional investor peers focus most upon equities, according to new research by State Street Corporation.
The research, conducted by CoreData in April, surveyed 250 investment professionals at pension funds, endowments and foundations, insurance companies, sovereign wealth funds and other institutions managing assets globally. Asia Pacific investors comprised 16% of the total respondents.
The study reveals that 52% of institutional investors globally would like to increase their allocation to equities in the next three to six months despite the market volatility caused by the coronavirus pandemic. In contrast, only 33% of Asia Pacific institutional investors are looking to do so.
In this region, the most in-demand asset class is private credit; 40% of Asia Pacific respondents say they would like to increase allocations to it. This is followed by equities (33%) and active investments (25%).
“This is not surprising as it has been an ongoing trend that Asia Pacific institutional investors are diversifying into private credit. This trend has been in Europe and the US for some time and starting to play out in Asia. The pandemic has just accelerated this development in the region,” Ian Martin, global head of asset owner segment at State Street, told AsianInvestor.
Private credit is a type of alternative asset that typically gives investors an illiquidity risk premium. It is broadly defined as lending extended directly to firms by non-bank investors. Some examples of the asset class include opportunistic credit and distressed debt.
The latter category has particularly enjoyed rising investor asset flows, given the strain that the Covid-19 pandemic has placed on many companies across the world. Among them is Korea DGB Life Insurance.
DGB Life currently doesn’t have any distressed debt in its portfolio and has yet to set a specific target allocation, but it is eyeing distressed debt and its private debt pot is expected to rise by over 20% to 30% within the alternative assets bucket, said Jeong Seung-Ki, manager of asset management at DGB Life.
However, not all asset owners are convinced. Jang Dong-hun, chief investment officer of Korea’s Public Officials Benefit Association (Poba) has told AsianInvestor the illiquid nature of distressed debt is often overlooked by investors and managers.
The lack of a stable cash flow from distressed asset investments can also be an issue for pension funds like Poba, Jang said.
The State Street survey findings also show Asia Pacific institutional investors have become more optimistic about their ability to hit their investment goals, as financial conditions have improved following the market crash in March.
Accounting for Covid-19, 38% of Asian institutional investors believe they will meet their short-term objectives (compared with only 24% globally). More positively, 85% believe they will meet their long-term objectives, versus 56% globally.
The virus has generally not impacted Asia Pacific countries as heavily as the rest of the world, which has led to less financial stress in the system and a generally more optimistic investor sentiment, Martin said.
That said, most investors believe the economic recovery will be more “U-shaped” than “V-shaped”, with 57% of institutional investors globally expecting economic activity to return to normality only in 2021. Asian institutional investors have similar expectations to their counterparts.
Meanwhile, as the lockdowns amid the ongoing Covid-19 pandemic disrupts investing activities for both asset owners and asset managers, State Street's study revealed that timely reporting has become a headache; 53% of the surveyed asset owners pointed to it as their biggest challenge.
For instance, defined contribution pension plans and insurance companies need to provide daily asset pricing and net asset values. With unprecedented market volatility and volumes, national and regional shutdowns, and most employees and vendors working from home, one of the challenges for investors has been to file required reports on time, Martin explained.
This is followed by heightened liquidity risk (48%) and difficulty in cash forecasting (23%). But institutional investors have worked with their service providers to solve most of these initial challenges, he added.