Asia, both as a source of capital and as an investment destination, appears front and centre for a growing number of private equity investors.
According to latest industry estimates, the pick up in allocations to private equity already seen among large institutions and family offices in Asia is expected to accelerate in 2019 and beyond.
"In this highly volatile environment of 2018 for the public equity markets, Asian asset owners are now rethinking their proper asset allocation strategy," Timothy Tsui, director of Hong Kong single family office Arbutus, told AsianInvestor. “They are keen to find suitable investments in private equity."
Local investors confirm they also see global private equity funds, not just Asian ones, allocating investment capital to Asia and emerging markets in greater numbers.
Two weeks ago, the Monetary Authority of Singapore issued a $5 billion mandate to encourage private equity managers.
Tsui said the context for the private equity boom is that "it is a very difficult time to be a manager of money, whether you’re a high net worth individual or the CIO of the Hong Kong Monetary Authority."
“We’ve been very fortunate to have a massive bull run (in public markets) since 2009, but that won’t continue," he told AsianInvestor. "Europe is poor, the US has its issues, China has its issues; we have a trade war going on.”
Tsui noted how liquidity, after years of central bank quantitative easing, has pumped up asset classes across the board, from Hong Kong property to US equities and even cryptocurrencies.
"And yet we live in a world where billions of dollars [are] stuck in sovereign wealth funds and insurance companies, wondering what they are going to put their money into, knowing that everything is bid up,” he said.
The trend for greater allocations to private equity is supported by long-term structural trends too.
JP Morgan Asset Management in Hong Kong said in a report this week that it sees increasing alpha opportunities in the sector driven by disruptive innovation and geographic expansion.
"Today’s large and accessible private asset markets offer potentially superior returns, subject to illiquidity risk and appropriate manager due diligence," the report said.
Speaking to AsianInvestor, Hannah Anderson, a Hong Kong-based global market strategist at JP Morgan, reiterated the message.
“Within our alternatives universe, our return assumptions are in aggregate the highest for private equity," she said. "We gave an upgrade to our [private equity] assumptions this year, based on an expanded opportunity set. We see private equity managers, particularly in the larger cap space, looking beyond the core markets, to emerging markets for example."
She also expects private equity allocations specifically to Asia to step up in the next cycle: “We do really see that as a trend.”
It's a point reinforced by Tsui.
"A company can come from nowhere and be massive multi-billion dollar private organisation," he said. "You have this immense speed of private company valuations going through the roof, and it’s only happening in the private markets. It took Tencent several years to 10x their shares in public markets, but in private markets it can take six months to two years."
Fintech and healthcare are already $100 billion markets for private equity investment. But there are other opportunities too, Tsui said, citing the B2B space, which he believes has been neglected.
“Everyone has been focused on consumer apps for the past 10 years and, I agree, there are a lot of darling stories there. But what is also clear is there are thousands of other businesses globally. Altogether the market value would be in the trillions. They have problems too, but no one is helping them,” he said.
You can't have too much of a good thing though, warns JP Morgan in its report.
“Given the paucity of returns in traditional asset classes, we expect capital will continue to flood into alternative assets in search of enhanced returns — but probably pushing up valuations and eventually weighing on future returns,” it said.