Asset Owner Insights: PE falls out of favour in alternative asset allocation

Asia-Pacific asset owners have lost interest in private equity, although alternative asset allocations, in general, have increased from 15.3% to 21.5% over a six-month period, according to AsianInvestor’s most recent survey.
Asset Owner Insights: PE falls out of favour in alternative asset allocation

Private equity for asset owners in the Asia Pacific has gone from the most popular to the least favoured alternative asset class within a span of six months, according to the latest Asset Owner Insights (AOI) survey. 

Its leading position has been replaced by real assets and private debt.

From October 2021 to end March 2022, asset owners in the region had increased their allocation to the private market from 15.3% to 21.5%. However, private equity was the only asset class that showed outflows, with overall weight dropping from a leading 4.9% to a mere 2.6%.

Asia-Pacific asset owners' asset allocation as of March 31, 2022

Instead, the largest increase was seen in private debt, followed by infrastructure and real estate. Real estate remained the most popular alternative investment at 7.1%. Private equity was sharing the leading position as of the end of September 2021.

Asia-Pacific asset owners' asset allocation as of September 30, 2021 (Source:AOI)

AOI is AsianInvestor’s proprietary data intelligence platform. The latest survey was conducted in April and May 2022, gathering datasets from 69 asset owners across the region. Total assets under management (AUM) of the respondents were $7.5 trillion as of end September 2021.

“From the fourth quarter of 2021 to the end of June this year, we saw a mild drop of dry powder as the new fund raised was less than the capital being called in this period. It might be signalling a potential slowdown of private equity fundraising, driven by higher market volatility and the denominator effect,” said Eric Chng, head of alternatives and insurance client segments for Asia Pacific at State Street.

The elevated market volatility since early 2022 has caused a slowdown in both investment and exit activities, he told AsianInvestor.

Within the private equity space, AOI’s latest data showed that investment was opting mostly for direct investments, although growth funds were also of some interest. North America remained the top destination for private equity investment.

On the other hand, allocation to private debt was on the rise. Infrastructure debt and direct lending were still the most favourable instruments within the space, AOI data showed.

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Real estate debt came third, climbing up the weight ranks since the third quarter of 2021, when 70 asset owners with a total AUM of $5.35 trillion were surveyed across the region back then.

Regionally, while North America was the most popular destination, Asia wasn’t far behind.

“Portfolio diversification and the continued pressure for yield generation is driving allocation to private debt and infrastructure, which appears to be more suited to the current market cycle,” said Janet Li, Asia wealth business leader at Mercer.

Queensland Investment Corporation’s (QIC) head of private debt, Andrew Jones, also noted that a rising rate environment is generally favourable to private debt investment. One of the benefits is that private debt investment is typically floating-rate loans, which are correlated with interest rates.

Jones told AsianInvestor in an interview in July that it is expanding the private debt team as it sees rising investment demand from clients.

QIC is a sovereign wealth fund that also has external asset owner clients, including superannuation funds in Australia, other sovereign investors, and insurance companies.

They are looking for differentiated but predictable yield, with stability and added diversification to the portfolio, Jones said.

Additional reporting by Hans Poulsen.

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