The private debt market has grown at a steady pace over the past decade, and despite a slowdown in deals, investors anticipate strong interest amid higher interest rates and lower private equity (PE) valuations.
Even though the amount of dry powder has skyrocketed from $17.7 billion in 2010 to $147.6 billion in 2020, fundraising has plateaued over the past few years.
Reasons for this slowdown include lower interest rates pre-2022, the pandemic and difficulty in finding deals, industry insiders told AsianInvestor.
However, investor interest in private debt is likely to continue its growth as central banks turn hawkish amid rising inflation, volatile markets drive investors to safer asset classes, and PE valuations fall.
Sun Life Financial Asia has dialled down its positions in Hong and China equities over the past year in a bid to absorb risks stemming from geopolitical tensions.
Even though valuations are now relatively cheap in both markets, with most macroeconomic risks being priced in, Sun Life is not likely to be bullish towards them any time soon.
Instead, the Asian arm of the Canadian life insurer will aim towards greater diversification across Asia, especially in the Association of Southeast Asian Nations (Asean) markets.
This is in line with its long-term strategic asset allocation target since 2020, while it is also focusing more on a tactical asset allocation amid downside risks.
“When you focus purely on the fundamental market drivers, which is basically corporate earnings, interest rates, Covid impact on the consumer, and regulatory risk particularly, most of that is priced into the earnings,” said Jimmy Weng, Hong Kong-based head of equities, Asia at Sun Life Financial Asia.
More university endowments are shifting funds away from traditional markets to alternatives in search of higher returns to manage inflation and meet the rising costs of operating university campuses, said investment experts familiar with this group of asset owners.
University endowments have been allocating more budget to alternative assets in recent years, according to a senior Asian university endowment executive.
With global inflation and interest rates on the rise, the executive, speaking anonymously to AsianInvestor, expects the shifting of endowment investments away from equities and bonds, roiled by market volatility, to private equity and real assets to be sustained.
“Investing in traditional assets like stocks and fixed income are becoming more challenging. Moving into alternatives can give you better risk-adjusted returns,” he said.
“Unlike insurance funds, endowments are not constrained by capital charge, hence they are able to take a long-term investment horizon and higher risks in return for higher expected returns,” he added.
A Republican wave of anti-ESG sentiment is gaining momentum in the US, as GOP officials and lawmakers leverage their power to promote gas and oil interests by discrediting the asset management industry’s efforts to combat the climate crisis according to a recent investigation by the New York Times published on August 4.
The author, David Gelles, reviewed more than 10,000 pages of documents and emails throughout his investigation, which uncovered a concentrated effort by nearly two dozen Republican state treasurers to halt climate action and oppose regulations that would make clear the economic risks of the climate crisis.
The GOP lawmakers are lobbying against climate-conscious nominees to key federal posts and using tax dollars under their control to punish companies that want to reduce carbon emissions.
As Japanese investors, led by the Government Pension Investment Fund (GPIF), increase their focus on environmental, social and governance (ESG) factors, Japanese government bodies are also making a further push to increase the quality of these efforts.
On July 12, Japan’s Financial Services Agency (FSA) sent out a new draft code of conduct for ESG evaluation and data providers. The voluntary code advises investors to pay attention to the objectives and limitations of ESG data.
Among other things, the draft suggests that ESG data providers with Japan-based operations should ensure they have a sufficient number of qualified analysts while giving companies time to examine information for errors.
The proposed code will require data providers to “secure necessary professional human resources'' and “develop capacity building of human resources…even if individual employees do not necessarily have all the necessary expertise.” The ESG market is currently facing a shortage of skilled human resources, the code said.