Co-investments stand out as an avenue for both managers and investors to consider
April 2019, Singapore—Alternative assets have been gaining traction among institutional investors in Asia over the last few years. With uncertain and volatile market conditions, it is not surprising that investors are turning to lowly correlated strategies, which serve as good diversification tools for portfolios dominated by traditional assets, as they look for other avenues to achieve higher returns.
The trend to engage in alternative investments is likely to continue, as shown in a survey conducted for The Cerulli Report—Institutional Asset Management in Asia 2018. Private equity and private debt, in particular, were rated highly as strategies asset managers expect Asia ex-Japan institutions to seek over the next 12 to 18 months.
More than half of institutional investors in the Asia-Pacific region have invested in private equity, lured by their attractive fees and performance, despite concerns over high valuations. Private debt is seen as easier to invest in than private equity, due to less capital competing for assets, faster deal flow, and fewer instances of distributions outweighing capital calls. However, as the asset class becomes more popular, issues around competition are likely to appear. It is also notable that although the funds being raised for private debt are increasing, the number of reported deals has actually been diminishing since 2015.
Meanwhile, despite their poor performance last year, there is renewed optimism around hedge funds, with positive eturns seen in the first two months of 2019. The performance of Asia-Pacific hedge funds, in particular, rebounded from -8.5% in 2018 to reach 5.1% in February 2019.
In these alternative asset classes, Japan is a key market driving demand. For example, it houses the largest proportion of active private debt investors, and is also the biggest market in the region for such funds. In the area of private equity, it is one of the top three countries in the region pouring in capital, besides China and Australia. In the hedge funds space, Japan’s institutional investors rank after Australia’s in terms of hedge funds marketshare.
In nearly every alternative category, co-investments stand out as an avenue for both managers and investors to consider. “It is a win-win situation—fund managers get to build stronger relationships with investors and increase their chances of successful fundraisings, while investors can benefit from cost savings, network expansion, and knowledge transfer,” says Ken Yap, managing director, Asia at Cerulli Associates, a global research and consulting firm. “Traditional managers looking to jump into co-investments will need to enhance their propositions and client servicing to compete with alternative specialists armed with years of experience and innovation.”
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