Asian institutions and high-net-worth individuals are increasingly turning to alternative investments, with Asia-Pacific alternative managers’ assets standing at $20.7 billion as of September 30, 6.1% up from the end of 2012, according to Cerulli Associates.
This figure is admittedly rising from a low base – often less than 10% of an investor’s total portfolio. Korea Investment Corporation (KIC), for example, had no money allocated to alternatives in 2008, but by year-end 2012 had allocated nearly 11% across private equity, hedge funds, real estate and commodities. KIC managed $61.6 billion as of March 2013, by AsianInvestor figures.
Overseas property in particular remains the alternative asset class of choice for Asian institutions, with many seeking to take advantage of what they see as attractive pricing. China’s Ping An Insurance bought the Lloyd’s building in London for £260 million ($426.2 million) from Commerzbank’s real estate investment unit last July.
Other notable deals last year include Hong Kong Monetary Authority forming a joint venture with Great Portland Estates to own and develop the Hanover Square Estate in London’s Mayfair in November. In July, Korea’s Samsung Life purchased 30 Crown Place in London for £142 million ($232.8 million), and in June, the Korea Teachers Pension Fund teamed up with several insurance firms to buy Galileo Tower in Frankfurt. Meanwhile Singapore’s GIC bought a 50% stake in London’s Broadgate office complex from Blackstone in August.
To meet the rising demand for alternatives, several traditional long-only managers are seeking to boost their alternatives expertise. In June, Franklin Templeton bought the remaining 80% stake in Pelagos Capital Management (it bought a 20% stake in 2010), which manages commodities, managed futures and hedge fund assets. Templeton also acquired a majority stake in K2 Associates, a fund-of-funds manager, in late 2012.
This shift by long-only managers into alternative assets will be gradual, as it takes time to integrate the different arms and fully build up the alternative investment capabilities, says Cerulli.
Questions also remain about whether Asian institutions prefer large managers with wide-ranging investment capabilities or more specialist firms. Institutions surveyed by Cerulli appear divided on the issue.
The increase in AUM for alternatives firrms is largely a result of institutional cash – the retail community has not been receptive to alternatives, finds Cerulli. Many are wary of investing in products they’re not familiar with, and are put off by higher management fees. To top it off, memories of the 2008/2009 financial crisis still linger. As such, asset managers have their work cut out to regain the trust of retail investors.
Yet according to financial advisory firm DeVere Group, the Hong Kong high-net-worth community is increasingly seeking advice on global real estate opportunities. Some 56% of its clients in Hong Kong sought advice on domestic and international property investments in the first three quarters of 2013, compared with 44% over the same period the year before.
“This trend is primarily driven by investors being compelled to find alternative means of securing a return on cash due to the ongoing low interest rate environment,” says Edward Rice, area manager at DeVere in Hong Kong.
The institutional shift towards alternatives will continue, but will differ from country to country, says Cerulli.
Some Chinese institutions continue to show a preference for offshore opportunities. China Investment Corporation (CIC) has raised its long-term direct exposure to overseas infrastructure, energy and mining. Recent deals include a £450 million ($738 million) investment into London’s Heathrow Airport, a $187 million investment in the Moscow Exchange and a £276 million ($452.7 million) investment in London-based utility Thames Water.
In addition, the State Administration of Foreign Exchange (Safe) set up an office in New York last year to oversee its alternative investments portfolio, and reportedly invested $500 million into a real estate fund managed by Blackstone. “This is unlikely to be its last foray into the offshore alternatives space,” Cerulli says.
Chinese insurance firms are also likely to seek more opportunities offshore. While mainland insurers have traditionally avoided foreign investments due to low-yield environments and the strengthening renminbi, the lack of long-term domestic bonds and volatility in the A-share market has prompted investors to view overseas investments more favourably.
Korean institutions, meanwhile, remain keen on private equity, real estate and hedge funds, and are particularly selective about the latter. For example, in July, Korea Post issued a fund-of-hedge-fund request for proposal, noting it would only consider vehicles run by experienced managers with at least $2 billion in AUM and a five-year track record.
In Southeast Asia, large institutions favour property and private equity, and retail investors tend to go for property and infrastructure.