Institutional demand for alternative investments has swelled in Asia Pacific in the past year or so, with asset owners keen to know how best to access private markets in particular, say fund-servicing executives. But the sheer amount of capital set to flow into such assets has larger investors worried about whether there will be a sufficient supply.

Kevin Wong, Asia-Pacific head of sector solutions at State Street, told AsianInvestor: “We have spent the better part of last year and much of this year talking to quite a number of large asset owners about their interest in alternatives and specifically allocating more to this space.”

He and other fund-service providers expect more such portfolios to be handed out as investors continue to search for yield amid the current ultra-low-rate environment.

GPIF a clear example

He cited as an example Japan’s Government Pension Investment Fund (GPIF). The retirement institution plans to put up to 5% of its ¥130 trillion ($1.2 trillion) of AUM into alternatives, suggesting a potential allocation of as much as $60 billion. “These are very big numbers,” noted Wong. 

The sheer amount of money is raising concerns among asset owners about a potential lack of supply of alternative investments such as private equity, said Wong (pictured below). This suggests alternative asset prices could well be bid up in the next six to 12 months, as institutions vie for opportunities, he added.

Moreover, insurers and retirement schemes such as China's National Council for Social Security Fund and Taiwanese state pensions are moving to ramp up their private equity exposure. Real assets such as infrastructure and property are also attracting a great deal more attention.

CP Yap, Asia head of custody and fund services at Citi, said the average Asia-Pacific institution’s allocation to alternatives had risen by 5-10 percentage points in the past year. Private equity has seen the biggest inflows, he added, with average allocation rising by 10-20 percentage points over the period, via both funds and direct/co-investment.

Peter Jordan, Asia-Pacific head of global fund services at Northern Trust, based in Melbourne, confirmed the trend: “The most activity [in terms of mandate discussions] we’ve seen in the past six months [in Asia Pacific] has been in the alternatives space,” he said.

The level of interest in alternative asset type varies depending on location. Among Australia investors, for example, there is particularly strong appetite for infrastructure and property, said Jordan. 

Citi’s Yap, on the other hand, has seen a roughly even mix of hedge fund and private equity mandates in Australia and Japan. Pensions, sovereign wealth funds and even large wealth managers in those markets have been allocating more to PE and hedge funds with global exposure, he said.

However, elsewhere in Asia – beyond Australia and Japan – Yap said there had been a lot more focus on private equity, real estate and infrastructure than on hedge funds. 

Internal versus external

As part of this shift, larger entities are also increasingly considering building teams to manage these asset classes internally, say industry observers.

Asset owners are increasingly taking more investment decisions in-house, rather than getting managers to run, for example, simple Asian equity portfolios or passive strategies, said Jordan. This is a clear trend among the big Asian sovereign wealth funds and Australian superannuation funds, he added.

A major driver of this appears is a desire to reduce the costs involved with hiring external managers, say fund-servicing executives. “The view taken by asset owners tends to be: ‘Why pay an asset owner a fixed basis-point fee to do it when we could do it cheaper?’,” said Jordan.

But internal asset management raises questions of finding and retaining the right talent, maintaining a core asset management set-up in-house, and the whole compensation challenge, he noted. “And if [investment professionals] leave, how do you deal with that ?”

Discussion of the pros and cons of internal versus external investment management has been a growing area of focus in the past year, added Jordan. 

Look out in the coming days for an article focusing on how the relationship between asset owners and their managers and other service providers is shifting.