Soaring demand for unlisted assets has pushed up valuations so much that investors are increasingly having to lower their return expectations.

Among them is Thailand’s $12 billion Government Pension Fund (GPF).

“It’s much more difficult to make good returns on what you invest in at these values,” Teerapong Ninvoraskul, head of the private market investment department at GPF, told AsianInvestor on the sidelines of the AsianInvestor Investment Summit in Hong Kong last month.

Pricing of private market assets -- non-mainstream investments including private equity and debt, real estate and infrastructure -- are at the higher end of the valuations cycle and pose a challenge for investors, he said.

Typically, the best performance or vintage year of any market or asset is when valuations are at more reasonable levels, Teerapong said. "[But] now return expectations [from private markets] have come down compared to three years ago."

The vintage year in this case refers to the year when a private market fund starts to make investments.

Teerapong did not clarify what private market investments he was referring to, or the extent to which target returns may have been reduced, but he did disclose that GPF had about 3% of its total portfolio allocated to global private equity and about 2% to global infrastructure at the end of May. 

He said it was still possible to generate attractive returns from private markets but that the buffer for error is now much lower due to the higher prices. 

“We are definitely more cautious,” Teerapong said.

For all that, the Thai pension fund will continue to selectively raise its exposure to private markets, of which it has been a long-time proponent, Teerapong said at the AIS gathering.

However, he declined to specify which sectors or asset classes the pension fund is interested in investing. 

Teerapong is not alone in toeing a more cautious line on private market returns. For instance, yields on private real estate investments have steadily fallen.

"Three to four years ago a core income-producing asset in Asia Pacific could have generated a 10% to 12% internal rate of return, but now 7% to 10% is more realistic, Louise Kavanagh, Asia-Pacific head of real estate fund management at US asset manager Nuveen, told AsianInvestor in March.

PUBLIC VERSUS PRIVATE

Because private market investments are highly illiquid and require capital to be locked up for long periods and demand a relatively higher risk appetite, such investments can be accessed only by large sophisticated investors.

In private equity, for instance, some of the world’s largest institutional players are pension funds and sovereign wealth funds.

Private equity firms raised $701 billion globally in 2017, capping an extraordinary five-year stretch during which they raised more than $3 trillion from investors, the Global Private Equity Report 2018 by Bain Capital shows.

The report noted that while investors are now starting to wonder whether private equity markets are getting too hot, they remain committed to the asset class because of the promise of superior returns.

"As of mid-year 2017, the median net return of [private equity] holdings in the portfolios of public pension funds over a 10-year time horizon was 8.5%, compared with 4.2% for public equities, 4.5% for real estate investments  and 5.2% for fixed income,” the report said. "That kind of outperformance is irresistible in a period marked by persistently low yields on most other investment options.”

In 2017, however, it was a different story as many public equity markets enjoyed a barnstorming run. 

The S&P 500 index, notably, soared by 26%, extending a multi-year bull run that has both surprised and worried investors. However, higher levels of market volatility since early 2018, coupled with growing geopolitical tensions, has helped to slow the bullish momentum, limiting the US benchmark index to a year-to-date gain of just 3%.

Overall, given the strong performance of public markets, there are fears that what goes up must  inevitably come down to some extent.

“Everyone talks about a correction in the prices of risky assets,” Teerapong said. “Currently, I don’t expect a one-time event that could lead to a huge crash, but you can never really tell.” 

*Joe Marsh contributed to this story.

AsianInvestor will host its 2nd Thailand Global Investment Forum on September 6 in Bangkok. For more details contact Terry Rayner via email or on +852 31751963.