Asia’s private market is increasingly in need of specialised general partners that can source good deals and keep their funds transparent as appetite grows for private markets amid rising inflation, according to regional experts.

With the dry powder in the world's private markets at an all-time high of $1.6 trillion - and $180 billion of that in the Asia Pacific region - investors searching for yield in a low-rate environment are being attracted to private markets as a hedge against inflation, according to proprietary data from State Street.

“You can start to see areas of real assets that are emerging that are becoming quite keenly priced, and they're often the big-ticket hero sort of assets that everyone is chasing,” said Queensland Investment Corporation (QIC)’s chief economist Matthew Peter.

Matthew Peter, QIC

“It's going to increasingly require managers who can originate assets in particular areas where the market hasn't been completely swamped and driven valuations to a level where the yields are so low, it's not worth investing in them,” Peter told AsianInvestor.

Peter said QIC is looking for emerging themes - for instance renewable energy - that they've had a deep understanding of in Australia before venturing into investments in the US or Europe.

“I think experience in actually doing that is important to avoid committing to an asset and finding that you are actually going to spend a decade till the fundamentals catch up with the valuation,” Peter said.

EASY DAYS OVER

According to State Street data, Asia is no longer just a place for deals but also for fundraising. In 2012, only 3.7% of global capital raised in private markets were from Asia. In 2021, the number went up to 20.8%.

This upward trend is likely to continue as wealth creation accelerates within the region, said Eric Chng, State Street’s head of Alternatives and Insurance segments for Asia Pacific.

“Managers in the next one to two years will have to increasingly justify why they bring value and what kind of areas they are specialising in. For instance, a healthcare investment fund will be able to access quality deals at a much better valuation because they just have the access.

"I think it will be a year driven by access from a proper deal pipeline perspective. It will force managers to become more specialised. It means going back to their core and doing what they do, but doing it better. There's just no lack of money at the moment, there's just a lack of access.”

Eric Chng, State Street

As more large public institutions and life insurance companies start to build up internal trading desks and do more co-investment or direct investment, it creates a crowding-out effect on valuations.

This increases the demand for an accurate top-down view of their portfolios across different asset classes, Chng said.

“Private equity, for example, has moved away from ‘Give me the money, don't ask me any question for the next 10 years and I'll come back telling you we've doubled or tripled your money'. I think those days are over,” he told AsianInvestor.

“They (GPs) are increasingly asked to justify how they're investing that money. So that top-down view, transparency, and data management has to move away from [traditional] spreadsheets, internal rate of return (IRR) modeling and stuff like that,” he added.

For a GP, he said, it must go through some 20 to 30 spreadsheets from its back-office fund administrators to physically identify the right IRR model and provide a sample to the investor before getting the money.

This has become a major challenge for GPs, which takes weeks to complete one such report, Chng said by way of example.

“It (lack of talent) is a real risk because of the sheer numbers of private equity fund being launched. A lot of managers are finding it very hard to find middle and back-office people, the war for talent is very intense,” Chng said.

Richard Chan, AXA

He noted that data transparency is one of the key barriers to overseas asset owners investing in Asia’s private market. According to State Street’s most recent asset owner survey, the region’s weaker accounting standards is a disincentive for investors compared with developed markets.

The capability, not only in deal sourcing, but also transparency and data management, will become "a key differentialting factor for fund managers attracting money”, Chng said.

KEEP SHARP

Richard Chan, AXA’s Hong Kong chief investment officer and Asia head of asset and liability management, also stressed the importance of keeping alternative assets diversified to avoid competition.

When others are putting money into traditional alternative assets, such as hotels, shopping malls, or even data centers and logistics, one should consider some niche assets, such as data infrastructure like 5G towers.

And when people all start to look at niche areas, maybe it's time to look at traditional alternatives again, moving one step ahead to avoid competing or too much capital chasing an asset, Chan shared during AsianInvestor’s recent Insurance Investment Breakfast Briefing.