Wealthy family offices need to stay cautious and conserve cash as the macroeconomic outlook remains muddled, while remaining open to any opportunities to buy assets at cheaper prices than previously.
That's the advice from a senior executive who leads an outsourced chief investment officer (OCIO) business in the Middle East.
“I would say they should be holding large amounts of cash than they have done in the past. We still expect a recession or setback in financial markets,” Gary Dugan, CIO of Dalma Capital Management, told AsianInvestor.
Dugan, based in Dubai, UAE, also runs the firm’s OCIO business, which deals with family offices and organisations in the Middle East as well as globally.
While he typically eschews tactical portfolio moves, he believes some very good opportunities could be waiting for investors with resources to take advantage of the situation.
"After all, the companies that have been created by private equity and venture capital in recent years, as they seek startup capital for their next phase through the market, it’s a great opportunity for buying at much lower prices than we saw one to two years ago,” he noted.
Investors should not be trying to release money from their other holdings like real estate or selling other assets to fund those investment opportunities, he noted. “So it’s important to have the cash.”
Family offices in Singapore have also told AsianInvestor recently that they favour liquidity given the ongoing volatility in financial markets, uncertain macro outlook and rising geopolitical tensions.
And while there will be investment bets to make, investors need a discerning eye.
“In most cases, investors get carried away at the top of the market – and everyone certainly got carried away with private equity,” said Dugan.
Even now, given the riskiness and illiquidity of private markets, they can, on the surface, seem to be an unattractive proposition.
“Everyone has been hoping that a recession would bring down valuations. Higher bond yields have been a catalyst for lower prices and the risk of a recession would bring them down further,” he said.
Private markets fundraising in Asia declined by 39% in 2022, and by 17% since 2017, driven primarily by reduced investment in China, according to Mckinsey’s Private Markets Review 2023.
Private debt has been in focus in 2023 but there are concerns about its appeal as interest rates climbed.
“But private debt is priced off the policy rates of central banks, so if those go up, the return on some private debt goes up as well,” said Dugan, adding that his team remains committed to that asset class.
“But we’ve had a few battles with our family offices, who believe we should be taking profits right now, or sell out of private debt entirely because returns at 6-7% wouldn’t be attractive going forward. And we had to explain to them that 6-7% will become 9-12% when interest rates rise.”
As with family offices in Asia, the search for alternatives remains very much on the top of the agenda for most family offices in the Middle East, according to another industry expert.
“Public markets have been tough for about two to three years, so everyone is trying to find non correlated assets that produce stable to decent returns,” Arjun Mittal, found and CIO of Abbey Road Investment Group, a multi-family office in Dubai.
These assets could be hedge funds, venture capital, direct investments and private equity, he noted. “Family offices in this part of the world are definitely keen to access private markets.”
Abbey Road Investment
“There has always been in interest in investing in Asia, but COVID-19 did change the dynamics because major markets such as China, Hong Kong and Singapore shut down. They took a different path to what the UAE and then what Europe and America did in response to COVID-19,” he said.
Many countries in Europe opened their economies earlier than in Asia, where lockdowns and mask mandates remained in place for longer time periods.
“It didn’t put investors off, but it did slow down the momentum,” he said.
"In addition, what has been going on with China and the regulatory changes have made investors a little bit nervous.
"And while they still see that market as a great long-term story, they want to wait and see how the environment evolves before committing capital,” added Mittal.
He noted that the flow of money from the Middle East to Asia had slowed a little although it's only a matter of time before it picks up again.
Dalma Capital’s Dugan also noted that there is interest in accessing private debt in Asia is growing, although access remains difficult.
“Singapore has a growing number of platforms [for private debt] and that is where the excitement is, because the returns can be 12-15% and that too in US dollar terms. Other major Asian markets, however, don’t have a well-developed private lending market. So the new platforms [in Singapore] are seeing good support,” he said.
The Monetary Authority of Singapore has pledged to make the city-state a regional hub for private credit markets.
The Asian private credit market has grown by almost 30 times in the last two decades, from about $3.2 billion in 2000 to over $90 billion in June 2022, according to Singapore's central bank.