Investors in Asia Pacific intend to lower their allocations to primary private equity deals amid a hunt for higher yields and quicker exits, finds a new survey. And industry observers note growing interest in PE secondaries, amid growing impatience over the time taken to exit primary PE deals.

Investors’ preference for secondaries was clear in Deutsche Asset & Wealth Management’s Global Survey of Investors in Alternatives*. 85% of respondents said the performance of PE secondaries had met or exceeded expectations, ahead of any other alternative investment category, except listed infrastructure. In fact, 25% of respondents said returns from PE secondaries had exceeded expectations, compared to only 14% for primary PE and 17% for direct PE co-investments.

Primary PE refers to initial investments in funds at the time of fundraising, including funds of PE funds. Secondaries refers to the trading of stakes in PE funds after fundraising. Direct co-investments is where limited partners (LPs or investors in funds) invest alongside general partners (GPs, who manage PE funds) in specific deals.

Karim Ghannam, Deutsche AWM’s Asia head of alternative and fund solutions, puts the rising interest in secondaries down to the search for yield among Asian investors. Secondaries are more mature PE assets than primary PE funds, which typically have a 10-year life and often start to see exits – or the sale of investments, generating cash flow that can be returned to investors – after the fifth to eighth year of a fund’s life.

That said, secondary PE and direct co-investments are expected to be flat in terms of inflows/outflows this year, according to the Deutsche AWM survey.

In Asia, the slow pace of exits from primary PE funds has frustrated some investors. “GPs here are facing pressure due to the delay in exits – investors are asking why returns are below those of their peers in the West,” said Hong Kong-based Barry Tong, advisory partner at accounting firm Grant Thornton.

Nik Morandi, head of research at $32 billion fund-of-PE-fund manager Pantheon, agreed that in Asia, value creation takes longer than in the US and Europe, resulting in LPs giving Asia GPs more time to realise exits.

But as Asia’s PE industry matures, that patience may begin to wear thin. The level of PE investment in the region only reached a meaningful size in 2006. According to data provider Preqin, Asia-focused private equity funds raised $14.4 billion in 2004, which was three times the average capital amount raised between 2000 and 2003. By 2006 the annual fundraising had shot up to $57 billion.

Consequently, it is only in the next few years that a significant number of Asian PE funds will reach the end of their 10-year fund lives.

Ghannam said there is clearly less interest for primary funds of PE funds, especially among larger investors. And Deutsche AWM – which managed $1.26 trillion of client assets globally at the end of 2014, around 10% of which is invested in alternatives – had seen an increase in Asia allocations to secondaries last year.

Sources said investors are not keen to encourage more secondary sale exits from PE fund to PE fund, as doing so means that LPs continue to pay management fees on the investment if they are invested in both funds involved in the transaction.

Meanwhile, a private equity report by Grant Thornton last week found that 68% of respondents expect the number of secondary market deals globally to increase next year.

Moreover, professional service firms are staffing up, partly to undertake more due diligence for secondary deals. Alvarez & Marsal (A&M) recently set up a Shanghai-based transaction advisory team, for example, as reported.

Liu Xuong, who heads the new team, said the emergence of the PE secondary market in China is contributing to increased demand for operational as well as financial due diligence. “LPs are asking more questions of GPs,” he said.

But some argue that PE may not be the best alternative bet this year. Hedge funds look good, as they make money from market dislocations, said Peter Ryan-Kane, Asia-Pacific head of portfolio advisory at Towers Watson.

According to the Deutsche AWM survey, private and listed real estate were seeing the greatest increase in alternatives allocations among Asia-Pacific investors, followed by private infrastructure, single-strategy hedge funds, listed infrastructure and infrastructure debt.

DeAWM’s survey of 373 investors in alternatives including 8% based in Asia ex-Japan, 35% in the Americas and 57% in Europe was conducted between March-April 2014.