For the past few years it's become increasingly popular for Asia’s asset owners to discuss their desire to expand into alternative asset classes. And a coterie of leading institutional investors in the region has become very familiar with private equity in particular. 

GIC and Temasek in Singapore, the Hong Kong Monetary Authority and regional insurers headquartered in the city, plus larger life insurance and pension funds in Japan, Korea, Australia and New Zealand have all invested in the asset class. 

But speak to limited partners (LPs), general partners (GPs), placement agents and legal experts about the current market, and it’s apparent that Asian institutional investors outside the top 30 or 40 remain very wary of investing in private equity. 

“LPs with GP structures have increased their allocations to PE quite substantially over the last few years,” Chris Leahy, founder of Singapore-based risk advisory firm Blackpeak, told AsianInvestor. “You can see that in the amounts of dry powder around, particularly among the larger buy-out funds. That’s pushed up valuations because of the competition for quality assets.”

Blackpeak conducts pre-investment due diligence for private equity firms looking at  growth capital plays in Southeast Asia, Australia and India. Leahy said asset owners are increasingly interested in investing in private equity funds as LPs and co-investors, but increasingly in highly competitive situations. 

He believes their appetite is at least in part being driven by the fact companies are viewing private equity as an effective funding alternative to listed equities. 

“You are seeing much larger companies staying private for longer. In fact some of them stay private for good. You’re also seeing an awful lot of privatisations from listed markets, as the larger buyout funds can bring their fire power to bear, so I think that’s driving what’s been new or higher allocations than in the past.”

That shift is forcing more asset owners to consider raising their private equity investments, even as the overall pot remains substantial. Increasingly asset owners feel they have little choice but to do so, if they are to access some of the most appealing investments in the region.

PEAK POTENTIAL

While asset owners in more advanced market like Australia have been investing for private equity for over a decade, even Asian asset owners that actively invest in the asset class have typically only been doing so in earnest for maybe 10 years. 

That means most are unlikely to be near their peak potential allocation. 

“I would suspect [Asian asset owners on average] are not over-invested because they may well have been underweight before,” said Leahy. That’s partly because people’s perception of what a private equity investment is and can be, has changed.”

However, their overall interest is widely expected to rise. A survey conducted for research firm Cerulli in 2018 noted that asset managers were expected that Asia ex-Japan institutional investors would demonstrate greater interest in private equity from Asia ex-Japan over the next 12 to 18 months than in 2017.

Edwin Chan, regional head for Asia at Hong Kong-based placement agent Probitas Partners, believes there’s space for it to do so. He argued the average small or medium-sized institutional investor (those with assets under management of $20 billion or less) should have a private equity allocation of between 2% and 4% of their total AUM. 

“For the sovereigns it’s maybe 10% to 15% and in Singapore, for the likes of the [university endowment of] NUS it’s around 5% to 10% with deal sizes of $100 million to $300 million.”

A number of prominent examples fall at the lower end of those estimates. Thailand’s Government Pension Fund (GPF) is one such example. The $21 billion pension fund is required to invest at least 60% of its assets in low risk instruments, and it places another 25% in public equities. 

That leaves just 15% for other investments. GPF has to date raised its private equity allocation to around 3%, and aims to increase it to 4% over the coming few years. 

Yingyong Nilasena, deputy secretary general for fund management, said the pension fund decided to go with separate account private equity mandates in order to effectively cover high-conviction mid-market managers focused on growth equity, buyout and special situations.

“Returns have been very good, in the high teens for global investments,” he said. “For local investments, the returns were a little more varied but overall still very good."

BUILDING APPEAL

It’s a mindset that may need to change, if investors are to enjoy returns over the longer term. Chan at Probitas thinks asset owner LPs need to be more entrepreneurial and embrace technology opportunities in China and around Asia. 

“The most exciting sector right now, for example in China, is venture [capital] with investors going into the serious A and B rounds to find the next unicorn.” 

It’s an approach that Tsui agrees with. He suggested that LPs seek out opportunities in fintech, medtech and education: “It’s a hedge, not a speculation – that’s how I see PE. You definitely have risk at an early stage, but with the right management and strategy, you can really do well.”

“Technology can potentially kill a family business in two to three years – so I want to put myself in a position where I can adopt new technologies.”

There’s certain room for exploration. According to Probitas research, China-focused funds are now the second largest venture capital market after the US. But Chan noted LPs looking to invest in private equity needed to find GPs they could be comfortable with. 

“The key for LPs is to find GPs that have the right institutional mindset. It’s all very well to say these things about entrepreneurs – that they are gung-ho, they are smart. But if they don’t have that institutional mentality, it may not be the right fit with an institutional investor’s portfolio,” he said.

This article was adapted from a feature that originally appeared in AsianInvestor's Summer 2019 edition.