Demand for alternative asset classes among institutional investors has sizzled in recent years, driven by the need to generate higher alpha in a low-interest-rate environment. Asset owners worldwide have been pouring capital into a variety of asset classes such as private equity, private credit, infrastructure and property.
In some cases the planned commitments are huge. Japan’s Government Pension Investment Fund, the world’s largest retirement fund expects to allocate another $41 billion to alternatives, while Japan Post Bank aims to pour a further $62 billion into these assets by 2021.
However, with increasing market volatility and growing geopolitical risks, the outlook for alternatives in 2019 is far from certain.
Escalating global trade tensions, uncertainty over protracted Brexit negotiations and a slowdown in global growth, most notably in China, are likely to have influence on the fate of both public and private market assets.
So what is the outlook for alternative assets over the next 12 months? AsianInvestor asked five alternatives specialists for their views on different asset classes.
The following extracts have been edited for brevity and clarity.
Ritu Arora, CEO and CIO for Asia
Allianz Investment Management
In the private markets some interesting opportunities are developing in the unlisted space. We recently invested in Go-Jek in Indonesia. We are also evaluating other interesting opportunities which have an Asia focus.
We are increasingly coming across high-quality, high-growth tech businesses that are maturing and are shifting focus on profitability. Valuations should also start to get saner soon. We are keeping a close watch on these well run and profitable businesses of the future, with a preference for industry leaders.
The credit markets in Asia also provide a favourable risk-reward and are another area of strong interest for us.
However, alternatives are generally a less liquid asset class and the challenge in Asia is that apart from China and India, very few markets can take large volumes.
Nonetheless, even within India and China, valuations remain at elevated levels even for small (though fast growing) businesses. The moment investors concentrate on one market, it tends to get over funded rather quickly.
The key to success therefore lies in spotting opportunities where the action is still limited, but the opportunity itself is very promising. We are actively evaluating and investing in opportunities across alternatives where we find that risk reward is favourable.
Juan Delgado-Moreira, vice chairman and head of international
The recent correction in public equity markets in big parts of Asia, and China and India in particular, have created more opportunities for special situations in unique transactional dynamics with the right entrepreneurs and corporates.
This is a market where credibility to execute fast and relationships remain very important. However this segment of the market is quite volatile and deal flow very lumpy. In addition, the pressure by the [Reserve] Bank of India and the Chinese administration has increased on their respective banking sectors to sell down non-performing loans and reduce bad credits. Slowly but noticeably there has been an increased of deal flow in this space, which has always remained attractive.
Private credit has been one of the fastest growing strategies in the private markets (up 65% in number of funds from 2011 to 2017, according to Hamilton Lane data): more funds, more strategies, more options for investors. It is no longer just mezzanine and distressed, which once was the majority of private credit. We believe this trend has a long way to run globally.
In the current rate-hiking cycle in the US and the higher volatility environment, we are looking at mid-market direct lending with a flexible approach focused on origination, short duration, and high coupon.
Richard Jacobs, co-head of private markets
Kempen Capital Management
We look at investing in infrastructure through the lens of future key performance indicators, in which national and local planners are guiding mobility, energy and care through complex transitions.
Meeting new user requirements is clearly one indicator. But equally what we call the trilemma between price, reliability and sustainability remains a key factor. The UK Labour Party or Italy’s Conte coalition’s call to renationalise utility assets is testimony to this trilemma.
Privatisations allegedly haven’t led to more affordable or safer services. The Morandi bridge collapse [in Italy in August last year] may have been the closing argument. In the era post COP 21 [the 2015 climate change conference] in Paris, affordable, reliable and above all clean energy is required. Equally in sectors such as social care and data communication, pressures have increased, because of the advancement of technology casting an eye over the sector.
Being in the business of making long-term decisions, we are always conscious of the risks associated to changing sentiments, rules and regulations. A more top-down view is required.
Some existing (brownfield) regulated assets will face additional pressure from bottoming interest rates. We believe that prospects for value-add and greenfield infrastructure remain quite strong though.
We keep looking for assets related to the energy transition, such as flexible and fast-response power storage. Assets related to mobility, like for instance short distance trains; and assets related to demographics, such as care facilities.
Shawn Khazzam, Asia Pacific head of alternatives solutions group
JP Morgan Asset Management
We believe 2019 is the time for alternatives. The volatility in the market is seen as being beneficial for hedge funds. The dispersion driven by volatility will tend to benefit a number of hedge fund strategies. Another catalyst for hedge funds is rising rates [in the US].
This year, in the Asia context, traditional hedge fund strategies such as long/short could allow us to identify winners and losers and generate performance. The second strategy that we think presents the best opportunity in Asia is relative value, which will come down to statistical arbitrage and short-medium-term strategies. This strategy will be able to benefit from the market dispersion as well.
We also think the environment for macro hedge fund strategies will be better in 2019 compared to 2018.
We are seeing interest from Asia-based investors in relative value and long/short strategies. In terms of regions, both institutional and private banks that tend to invest in hedge funds have a global investment mindset. They are more likely to invest in liquid markets like the US and Europe. Some of the more nuanced players in the space will perhaps get into Asia [funds].
Zhen Ji, managing director for private equity
There are three categories that we pay a lot of attention to these days. The first category [in China] is artificial intelligence.
The second category in China, I think [because it is] more fitting [to] our fund size, is anything to do with environmental protection. It’s easier if we try to stick with two types of businesses – industrial waste and the recycling type of businesses – as the demand is tremendous.
Certainly pollution [control] is very high on the national agenda, and there’s a lot of money to be deployed here. It’s a category we think we can do well in but it takes a lot of work because there are no existing larger business to buy. The capital market actually has a good appetite for this in China, as well as in Hong Kong.
The third category is basically general healthcare. Healthcare, in the end, is an undersupplied market in China, there’s a severe shortage of doctors and hospitals.
Indira Vergis contributed to this story.