The current macroeconomic backdrop for alternatives investors is uncertain, given high interest rates and slow global economic recovery. Amid these challenges, however, lie opportunities for LPs and GPs to capitalize.
At our Private Equity, Venture Capital and Private Debt 2024 APAC Webinar earlier this month, the keynote presentation by Angela Lai, Preqin’s Head of APAC and Valuations, Research Insights, and fireside chat with experts David Kungsen, Co-CIO of Fosun Asset Management and Gary Leung, Head of Alternatives, APAC Clients from JP Morgan Asset Management, highlighted some of the bright spots in the APAC market.
Here are our three key takeaways from the session:
1. Japan private equity is making a comeback: Preqin’s November 2023 Investor Survey ranks Japan the third most popular choice for private equity investors, trailing only the US and Western Europe (excluding UK) (Fig. 1). Angela said: ‘Japan is a relatively stable option for investors, with opportunities for value creation through business succession for small and medium enterprises and carve-outs for larger corporations.’ The country’s current low interest rates and favorable foreign exchange rates have made it more attractive to foreign investors in recent years. Consequently, its share of total APAC buyout deal flow has increased, surpassing 30% as of the third quarter of 2023.
Fig. 1: Japan is the third most popular choice for private equity investors
'Investors were asked: 'Which developed markets do you see presenting the best opportunities in private equity the next 12 months?'
Source: Preqin Global Investor Survey, November 2023
2. Alternatives managers must adapt to attract APAC private wealth capital: Gary pointed out that private wealth in APAC, a substantial $25tn market, is under-allocated to alternatives. He reported that institutional investors, such as pension funds in the US, invest an average of 20–30% of their portfolios into alternatives, making incremental allocations challenging. In contrast, private wealth investors currently allocate roughly a mid-single-digit percentage to alternatives. Gary proposed a three ‘S’ model for GPs looking to fundraise from these investors: structure (understanding and catering to the liquidity needs and regulatory requirements of these family offices), service model (providing more frequent and high-touch reporting standards to meet their requirements), and strategic partnerships (collaborating effectively with alternatives distributors such as private banks and wealth managers).
3. Private debt in APAC is taking off: The APAC private debt market, though currently small at just 6% of global assets under management (AUM), is experiencing rapid growth. Angela highlighted India as the fastest growing private debt market in APAC since it introduced the Insolvency and Bankruptcy Code in 2016. This helped improve fairness and transparency in the credit recovery process and make it more appealing to debt investors. David also identified strong opportunities in specific sectors across Greater China, Southeast Asia, and Australia. During the webinar, he emphasized the importance of having on-the-ground expertise and strategic partnerships in these markets to help source loans backed by attractive assets and able to provide a margin of safety.
During the Real Estate and Infrastructure APAC Webinar, the keynote presentation and panelists highlighted that real assets in APAC offer diversification benefits to global portfolios, thanks to some unique fundamentals: population growth, digitalization, urbanization, and a growing middle class.
Dr Chua Yang Liang, Head of Group Research & Analytics at asset manager ESR Group, Mark Stulic, Partner at private markets investment firm StepStone Group, and Angela Lai, discussed three key trends:
1. APAC offers diversification benefits for global portfolios: Angela highlighted that cities such as Seoul and Tokyo have higher office utilization rates than those in Europe and the US, driving demand (Fig. 2). Meanwhile, in infrastructure, the energy decarbonization race will likely create long-term tailwinds for APAC. Mark also suggested that unique demographic trends will create opportunities, including in transport and telecoms.
Fig. 2: Office demand in Tokyo and Seoul has recovered since 2021
Grade A office vacancy rates of Seoul and Tokyo – 5 wards, 2019 – Q3 2023
Source: Colliers
2. Industrial and residential assets dominate investor interest: Demographics and changing consumption behavior will lead to shifts in the market. Dr Chua noted that demand for industrial assets has grown. E-commerce and niche segments of the residential sector, such as student housing and build-to-rent, are also set to expand. A poll taken during the webinar found that 57% of the audience thought industrial assets would attract the most investor interest, followed by 23% for residential, and 17% for offices.
3. Infrastructure is maturing in APAC: Large funds such as KKR’s new $6.4bn Asia-focused infrastructure vehicle indicate a maturation of the asset class in APAC, according to Mark. He suggested that as dry powder increases, LPs will focus on portfolio construction, and how to deploy funds to create diversified portfolios that can establish good track records.
At the Hedge Funds APAC 2024 webinar, keynote presenter Charles McGrath, AVP, Research Insights, and panelist Steve Cain, Portfolio Manager on the Diversified Alternatives Team at Janus Henderson Investors, discussed the outlook for the $4.37tn global hedge fund industry.
Three key trends stood out:
1. Low correlation strategies could attract more hedge fund investors if market outlook remains uncertain: Strategies such as insurance-linked strategies (ILS), cryptocurrency, global macro, and commodity trading advisors (CTAs) are growing in demand, and in favor of equity strategies, noted Charles in his keynote presentation. Preqin data covered during the webinar showed that investors are primarily choosing hedge funds for their diversification benefits.
Steve agreed. He suggested hedge funds can be a harbor in a storm, and if the global markets face another crisis, hedge funds will draw a wider pool of investors, including retail investors.
2. High interest rate environment may create opportunities for alpha creation: Steve pointed out that the years of low interest rates have compressed the availability of alpha in the long/short equity space. This will change as higher and more volatile interest rates bring about a greater dispersion of returns in stocks. Steve believes that capable hedge funds will be better able to generate carry and excess returns in a non-zero interest rate environment.
3. Japan and Australia may offer good opportunities in the APAC market: In response to Charles’ observation that capital inflows into hedge funds have been stagnant, Steve pointed out that non-US markets are ‘fertile grounds for long/short managers'. Japan could be a bright spot. New fund structures are being created in the retail space, which is a growing area of interest. He also shared predictions that the Bank of Japan will depart from a zero-rate policy, bringing about significant opportunity.
Another market Steve cited as growing in attraction was Australia. Fund managers there are also sophisticated in terms of fee levels and transparency – an added benefit to investors.
To view all three webinars in full, watch the recordings here.
During the webinar series we used data and analysis from our recent Preqin Global Reports 2024. Dive deeper into the topics discussed by our research team by exploring the reports with Preqin Insights+. Get a free demo of Insights+ here.
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.