Asian sovereign funds’ alternative plays offer potential
Opportunities also lie in co-investments with the more sophisticated funds
October 2018, Singapore. As sovereign wealth funds (SWFs) in the Asia Pacific venture further into alternatives, they are likely to search for managers who can partner them in the area of new and esoteric strategies. Co-investment opportunities are also available, particularly for funds which have built significant internal capabilities and tend to invest directly.
As public markets become more expensive, SWFs are increasingly allocating towards alternative strategies. Economic growth for most of the world is likely to be lower than it used to be; the world is in a deleveraging cycle, and in developed and most emerging markets, interest rates and returns are expected to be lower over the long term than in the past. This makes a case for illiquid assets in private markets.
GIC was an early mover into areas such as infrastructure and real estate; it was also reportedly the most active Asian private equity investor in the first quarter of this year. Australia’s Future Fund and China Investment Corporation (CIC) have some of the highest allocations among SWFs to alternative investments, at nearly 40% and more than 50% of assets, respectively.
The Future Fund outsources to about 100 managers, often in highly specialist areas. CIC seems content with its direct investments in private equity, private credit, real estate, and infrastructure, which has helped it achieve “stable and desirable returns, fulfilling allocation objectives”, according to its latest annual report. It offers opportunities to those able to partner with it in accessing investments; and those who can bring interesting alternative strategies to the table. More than 60% of CIC’s assets are externally managed, making one of the most lucrative SWFs, although it appears to be tight on fees.
Meanwhile, Korea Investment Corporation (KIC) is looking to invest more in hedge funds, private debt and private equity, and is strengthening its overseas offices to take the lead in such strategies. KIC allocates about 20% to 30% of its assets to external managers, but it has been gradually reducing the proportion of outsourced assets as it boosts in-house capabilities and direct investments. Still, it is expected to continue relying on specialist alternative managers, although it can be highly selective in working with them.
Within Southeast Asia, Singapore’s GIC and Temasek lead in sophistication and dominate SWF assets. Both entities have built robust internal capabilities and adopt a direct approach to investments, leaving limited scope in awarding mandates. Still, they could use manager expertise in both public and private markets–more so in the latter, which offers room for co-investments.
With the growing level of assets at SWFs, they will be keen to venture beyond the traditional sources of yield, either investing directly, or through funds or co-investments. As the funds seek more co-investment opportunities, they are likely to select specialist asset managers with expertise in deal sourcing and established track records.
These findings and more are from The Cerulli Edge—Asia-Pacific Edition, 4Q 2018 issue.
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