Thailand's Government Pension Fund started investing in private markets in 2003 and currently puts 14%, or $2.38 billion, of its $17 billion portfolio into infrastructure, property and private equity. It now plans to diversify further into hedge funds, says Teerapong Ninvoraskul, senior director of alternative investments.
He was speaking on panel yesterday at AsianInvestor's Southeast Asia institutional investment forum in Singapore. The aim of building alternatives exposure is to enhance returns and for greater diversification, said Teerapong, who cautioned against relying too much on in-house capabilities to do so.
It's tempting to over-extend your capabilities by trying to move into alternative assets purely via your internal team, with a view to saving money on fees, he notes. Ultimately, however, asset owners need to make use of external managers in order to allocate beyond their area of expertise.
The level of due diligence required on infrastructure and PE projects – in terms of local aspects and ensuring alignment of interests between GP and LP – requires extensive resources, he notes. “This is typically very difficult to do with an in-house team, unless you have $100 billion-plus in AUM.”
Edward Gustely, managing director of Penida Capital Advisors, a Jakarta-based specialist in emerging market infrastructure assets, echoes this view, citing his firm's major focus on “unmasking conflicts of interest at fund managers”. For example, families may be running the investment firm purely as a way of bankrolling their operating businesses, and not being transparent about their processes, he notes, speaking on the same panel.
GPF started investing purely in domestic private assets, although now has roughly half of the allocation in offshore markets. Asian investors tend to not invest heavily in regional infrastructure for a couple of reasons – in addition to not being very well versed in the area, they prefer to buy into brownfield rather than potentially riskier greenfield projects. But in Asia, greenfield projects are more plentiful, with more brownfield opportunities in developed markets such as Europe and the US, Teerapong notes.
Meanwhile, GPF has not yet invested in hedge funds but is looking at doing so “in the near future as another diversification tool", says Teerapong. “Under the current lower return environment, this is a natural thing to consider.”
Hedge funds, given their asymmetrical risk-return profile and equity bias, do have a role to play in terms of dampening portfolio volatility, says another speaker, Audrey The, senior private markets specialist at consulting firm Cambridge Associates.
Moreover, she adds, the one-to-two-year lockup that hedge strategies offer – as opposed to the seven- or 10-year lockups of other private-market investments – can be attractive for some institutions.
One relatively low-risk way of getting alternatives exposure that should interest Asian institutions is by using principal-protected notes with allocations to PE and infrastructure companies, says Gustely. Such instruments have proved popular in Europe, for example, and Penida is looking at offering them in Asia, he adds.