Asset owners worldwide are hungrier than ever for Asian alternative assets, a trend that continues to drive up the cost of talent in this area. And yet the speed of the rise in pay for private investment professionals slowed last year.
This poses a dilemma for the growing number of institutions looking to build teams to invest in private equity, real estate or infrastructure: how much should they be paying for expertise – and when?
Compensation for private capital investment professionals in Asia rose strongly again last year, but more slowly than in 2016, according to a survey* released on Wednesday by recruitment firm Heidrick & Struggles.
The slowdown was particularly marked for those at the managing director and associate/senior associate level (see table below). Mean total compensation for MDs was $825,550 in 2017, up 6.4% year-on-year, compared to a 17.4% rise in 2016. Mean total comp for associates/senior associates rose 9.9% to $277,270 in 2017, after a 20.7% jump the year before.
Certainly, there are widespread concerns that asset valuations may be close to peaking across various markets and that a downturn is imminent – particularly after the sharp rise in bond yields and the selloff in global equities in the past week.
Various asset owners have accordingly been reducing risk and taking profits on both listed and unlisted assets in recent months, following a multi-year bull run.
Still, Heidrick & Struggles expects the trend of rising private investment pay to continue “into the near future”, driven by the growth of funds heading to Asia, an expansion of investment platforms across private capital strategies within the region, and a shallower talent pool of investment professionals there than in Europe and the US.
The amount of funds being raised for investment into Asia continues to grow – it rose to $128.5 billion from $120.4 billion last year, according to Asia Venture Capital Journal data. And last month China’s Hillhouse Capital raised the biggest Asia-focused private equity fund so far, a $10.6 billion vehicle, to invest in technology, health care and consumer sectors in the region.
BUILDING ALTERNATIVES CAPABILITIES
All this reflects continued institutional appetite to increase allocations to alternative assets in Asia. There is a growing number of asset owners both within and outside the region looking to start or expand teams to make direct investments in private markets.
La Caisse de Depot et Placement du Quebec (CDPQ), Canada’s second biggest pension fund manager, is looking to build up its and infrastructure and private equity capabilities in Asia, where it has four offices.
CDPQ's even larger peer, Canada Pension Plan Investment Board (CPPIB), aims to more than double its 15% allocation to emerging markets to as much as third of its AUM by 2025. Asia will account for the bulk of this exposure. The C$367 billion ($281 billion) fund does most of its investments in-house and directly, so will certainly be adding more alternatives expertise in the region.
Asian asset owners have also been building private market teams, a notable example being Japan Post Bank (JPB), with around $1.7 trillion under management. The huge institution started its alternatives buildout in mid-2015 and by late 2017 had brought in some 50 staff to this end. JPB also said in May this year it would set up a joint investment firm alongside affiliate Japan Post Insurance to look at private equity opportunities
Another Canadian pension fund, PSP Investments, and the $151 billion Teacher Retirement System of Texas are aiming to set up branches in Asia, the former by the end of this year and the latter next year. Both are big private asset investors, so over time they are expected to add local private market specialists.
What’s more, Canadian pension funds are known to pay competitive market rates, so they can vie with the large alternatives managers for the best talent.
But they are also very smart, patient investors, so are unlikely to rush in and heavily overpay for staff. They are happy to partner with asset managers on mandates or co-investments until they have the resources and in-house expertise to go direct.
In any case, "many platforms, particularly smaller groups or pension funds, cannot afford to simply pay more to attract suitable talent", noted the Heidrick study.
Biding one's time may well be wise at this juncture: an economic downturn is likely to mean a drop in salaries and hiring appetite.