Although there has been cash hoarding among institutions and allocations have been skewed toward local fixed income since 2022, new investments are slowly returning, with increased requests for proposals seen in most Asia-Pacific markets in the first half of 2023 compared to the second half of last year. Cerulli is also seeing more searches for non-local assets in both alternatives and traditional assets.

Liquidity conditions for asset owners have improved in the last six months, thanks to the recovery in the public equity market and valuation recovery of public debts, and tighter control on policy and member loans. While it is still a difficult environment for new alternative allocations, demand from large public institutions continues regardless of market swings, with their five- and 10-year investment targets firmly in place.

Cerulli has seen a majority of public pensions and sovereign wealth funds looking to increase allocation to alternative assets. However, due to poor investment returns in 2022 experienced by all major public institutions in Asia, asset owners are under increasing government pressure to invest more domestically, where investment and forex risks can be more controlled.

In the last 18 months, private credit has been one of the most popular alternatives in Asian markets due to its inflation-protected floating interest rate feature as well as its provision of enhanced interest rates versus public fixed-income opportunities. While the interest in private equity remains for the long term, many investors believe that the lofty valuations originating from the 2020-2021 investment cycle have not been adjusted downward. However, in the case of China private equity, it seems there is now an active secondary market with substantial discounts of 40%-50% of par value being offered. Similarly, venture capital performance did not reach the expected levels as funds were rapidly deployed and the valuation of the portfolio companies reached unrealistic levels.

Across Asia, the research notes reduced real estate investment demand. Some concerns have emerged from U.S. commercial real estate exposures due to their high vacancy rates. Conversely, Asian commercial real estate is healthier due to low vacancy rates. Exposure to hedge funds has also fallen across the region, due to poor performance and many institutions paring down risk assets for regulatory adjustment. Infrastructure remains popular, given its inflation-tracking long-term income-delivering features.

“Despite the continued attraction to alternatives in the current investment environment, Cerulli believes asset owners should make conservative and careful selections, particularly in private credit and private equity,” said Soo Ah Ran Cho, associate director. “The next 12 months may reveal increased risk factors for some private credit issuers and private equities. Private equity valuations are due for downward adjustment due to inflated valuations in 2020-2021. As for private credit, with the current high-interest-rate environment, there might be higher delinquencies in the next 12-18 months given that many issuers will have difficulties refinancing once their principals are due,” she adds.