Market Views: How best to invest in the $7 trillion private market?

Experts have a diversified view on the appeal of private assets across the region, but one thing's for certain - inflows are rising, particularly into China and the US.
Market Views: How best to invest in the $7 trillion private market?

Private asset investing is exploding.

Surging investor inflows into asset classes such as private equity (PE) pushed the size of the overall private capital industry to $7.4 trillion as of end-2020, according to Morgan Stanley, which also expects the private market to reach $13 trillion by 2025.

Going forwards, Asia Pacific private capital assets are expected to grow particularly quickly, rising from $1.7 trillion as of September 2020 to $6 trillion by 2025, according to estimates from data provider Preqin.

Although private capital has gained prominence among institutional investors seeking greater diversification and extra return in a low-yield environment, risk has also risen a great deal. Investors in North America and Europe believe that risks to PE returns have increased substantially over the past 18 months, according to a Coller Capital’s Global Private Equity Barometer report published on June 14.

Three-quarters of the investors surveyed fear a worsening of geopolitical strife and trade wars, and over two-thirds are apprehensive about changes in the regulatory or tax environment, the report found.

Still, market players including Schroders, JP Morgan and HSBC.have restructured teams to take advantage of the booming private capital market.

Most recently, HSBC Asset Management announced on Wednesday (June 16) that it is bringing together all of its existing alternatives capabilities under a single business unit, HSBC Alternatives, with a 150-strong team and combined assets under management and advice of $53 billion. The firm’s alternatives assets have doubled over the past four years, according to the news release.

On June 7, rival JP Morgan Asset Management set up a new unit called JP Morgan Private Capital. The unit includes a new growth equity investment arm and an existing private debt business that sits within JP Morgan Asset Management's $168 billion Global Alternatives investment arm.

Schroders on June 6 grouped its private assets investments business under one brand, Schroders Capital. The business manages over $65 billion offers Schroders' private equity, private debt, real estate, infrastructure, securitised products and asset-based finance strategies.

AsianInvestor invited several private capital market experts to comment on which type of private asset attracts them most, and which market provides the most appealing return in the following months. 

The following contributions have been edited for clarity and brevity.

Shawn Khazzam, head of alternatives distribution, Asia Pacific
JP Morgan Asset Management

We are excited about three areas of private markets today – traditional private equity, special situations private credit and core infrastructure private equity.

Overall, we continue to have a positive outlook for private equity and venture capital despite an increasingly competitive market environment. We continue to invest across the spectrum with a focus on small-to-mid market companies (revenues of $10 million to $100 million) where there is less pricing pressure, less reliance on leverage, and where investors can drive transformational change and differentiated returns. 

Next, we believe that there is a great opportunity for stressed and distressed special situations investing across Europe and the US. The public market rally does not reflect the true problems that many smaller and lower-rated corporate credits are facing. This trend is most apparent in Europe as many European companies that received emergency government financing at the outset of the Covid crisis may not have protected themselves for long enough and their cash “runway” may be too short. 

Finally, core infrastructure private equity has proven itself as a lower-risk, more forecastable source of diversification in 2020. The risk premium of the asset class has stayed remarkably stable since 2000 and remains attractive. 

Niels Bodenheim, head of alternative credit
NN Investment Partners

This is still only a small portion of the overall global investment market where private equity and real estate equity have remained the largest portions of private capital with the earlier development of those sub-segments. The pace of growth is however moving the fastest in private debt.

There is a natural correlation as equity counterparts are looking for alternative lending sources to finance their purchases. While buyout financing remains a key component to the growth of private debt it is also the more traditional uses of capital (i.e. bank lending scenarios) that provide a lot larger investable universe.

We look at both buyout financing and general financing requirements from short duration (trade finance) to long duration (infrastructure) with an end borrower mix of consumers, corporates and government-related loans based on either cash flow or real asset structures. This widens the deployment opportunity significantly. Our investors have already put in over €2 billion ($2.77 billion) in new commitments year-to-date across our solutions.

The investor search for yield in private debt is now more focused on diversifying exposures in private debt given the further maturity of the asset class and investors are seeing the impact of financing the real economy. Floating rated debt is in near term focus given inflationary dynamics that are playing out, but there are also defensive reasons to lock in fixed rates for matching purposes on longer dates with the support of real assets security. 

Brad Bauer, partner and deputy chief investment officer
Värde Partners

Over more recent quarters, private credit markets have become much more active with both borrowers and lenders prepared to transact on market clearing terms. We have seen a growing opportunity across multiple asset classes and geographies notwithstanding the improvement in the capital markets and the macro backdrop.

Even before the pandemic, we viewed Asia Pacific lending as a structurally attractive market with a persistent shortage of private credit availability. Capital markets are less developed across the region, and providers of alternative capital are limited in number and scope, while strong underlying demand for credit exists due to growth dynamics in a number of industries characterised by high capital intensity.

The pandemic has only made this situation more acute, with additional demand from borrowers, and lenders tending to pull back – making both senior and special situations lending across Asia Pacific even more interesting. Historically, this imbalance has driven what we view as a sustained mispricing of credit in parts of both primary and secondary markets, and also longer periods of dislocation during and following shocks or cycles, than we tend to see in North America or Europe.

Jonathan Marlow, global head of private markets
HSBC Asset Management

We see larger, control - often corporate carve-out - deals prevalent in Japan and Korea as well as in Australia, where we look for pan-Asian plays of Australian businesses. In China, while we are seeing more control deals, the underlying market growth means there remains a lot of attractive opportunities for asset managers like us in the late stage VC/growth space.We see the Asia alternatives landscape as dynamically growing and maturing with different risk-reward attractions across the various regions and asset classes. 

With hugely supportive demographic and macro-economic trends, we particularly like the healthcare and consumer sectors. The Indian market is also going through a rapid transition with more control deals taking place, though minority transactions remain prevalent. We foresee a large opportunity here to support the growth of – and facilitate ownership transfers from – second/third-generation family-owned businesses.

Though the infrastructure market is in its early days in Asia, momentum is picking up. In the past, the market has been largely dominated by strong local conglomerates as well as governments. Today established infrastructure investors are starting to raise dedicated Asian funds, ranging from mature to less mature economies. 

Paul Sandhu, head of multi-assets quant solutions & client advisory, Asia Pacific
BNP Paribas Asset Management

Private capital has grown significantly over the past few years and this dynamic is showing no sign of abatement. 

An abundance of liquidity handed to investors by central banks globally is only the overriding theme that has contributed to this growth.  But the underpinnings that have and will hold this trend true are a need to find alternative yield and higher returns, the IPO blow-out we have had in 2020 and the focus on new technology especially around energy transition.

There is no surprise that when yields fall and public markets become volatile there are moves towards higher yielding infrastructure and high sharp private equity. The big theme last year was the willingness for private investors to support companies that are earlier in their business buildout and even still in their research and development stages.  And these investors have been rewarded, and rewarded significantly.

Adam Wheeler, co-head, global private finance group

We view traditional first lien debt financings to corporates as the broadest and most stable opportunity set within the private capital realm. From a total return and an income perspective, this asset class has the ability to generate stable net returns (6% to 12%) to investors through the cycle, depending on the structure, all while enjoying significant downside protection in the form of security on the underlying businesses.

We prefer to invest in companies that have the ability to generate consistent cash flows through an economic cycle. We lend to companies that have sustainable and predictable revenue streams, sticky customer bases, high barriers to entry, strong margins, and high cash flow conversion.

Yang Zhan, principal
Coller Capital

The private equity market continues to grow, and this has in turn stimulated growth in the private equity secondaries market. 

This market has experienced rapid growth over the last decade, but after three years of record growth, private equity’s secondary market contracted in 2020 as the onset of Covid-19 led to many secondary processes being delayed or cancelled early in the year.
Transaction volumes rebounded strongly in the second half of the year as public equity markets recovered and as market participants adapted to the new environment.

Coller Capital expects the secondary market to continue its growth trajectory in the next few years, as investors and fund managers use secondaries to reposition their portfolios for a post‐pandemic world. As well as expanding its geographical reach, in Asia especially, we expect the secondary market to continue embracing an ever-wider range of assets, including private equity interests in real assets, infrastructure, and credit.

The secondary market has shown its robustness and flexibility throughout the pandemic, and we believe these qualities will act as a basis for further evolution in its scope and sophistication.

Marcia Ellis, partner and global chair of the private equity group
Morrison & Foerster

Given the general and Covid-related volatility that continues to dominate the market, many private capital managers are finding that exclusive dedication to one asset class is not a long-term winning strategy in China. Across Asia, investors in private capital fund managers should look for a team that has experience with a variety of assets classes and that is poised to pivot as the market changes.

We expect the second half of 2021 to continue to be very active for funds deploying capital in Asia and particularly in China. Thus far, inbound investments by funds into China seem largely unimpaired by US-China trade tensions. We envisage both the US and Chinese governments to be cautious and selective when issuing sanctions as they are wary of creating collateral economic damage. 

This article has been updated with a photo of Jonathan Marlow, and edits to Adam Wheeler's comments for compliance reasons. 

¬ Haymarket Media Limited. All rights reserved.