Opinion: Asset owners face new dilemma with alternatives

In the past few years, many asset owners across Asia have been talking about adding allocation to alternative assets, with the challenges being how to find a good manager or deal in a crowded market. Right now, the true test for some has become how to divest instead.

The rout in the public markets this year has triggered a denominator effect in their portfolios, leading to private assets taking up a much larger share of the whole.

For sophisticated asset owners with a strategic asset allocation plan, this is one of the reasons why they have stopped committing new money to the private markets.

Meanwhile, with the public markets still hovering around the bottom, the traditionally illiquid private assets have become a tool for asset owners to realise liquidity, and this holds true especially for pension funds and life insurance companies.

In fact, some of these asset owners are looking for divestment within the alternative portfolio, AsianInvestor has learned.

The question now becomes: Can Asian asset owners grab hold of the right expertise to manage their private assets this way? The answer is: not quite.

In the past 10 years, when an asset owner said they wanted to add allocation to alternative assets, the solution was as simple as following the trend and committing to managers or funds that were big in private equity in tech or healthcare in the US or Europe; or putting them into an emerging infrastructure or real estate projects, which would generate a decent return after a few years.  

Much has since changed. To strike a balance now between allocation target, liquidity, and return, one needs sophisticated expertise to manage the alternative portfolio.

The challenges are manifold. The most important is to decide which assets to sell and which to keep within the alternative portfolio, as well as selling these assets under an acceptable term and price.

The urgency of liquidity needed is another factor that will decide how much room for negotiation there is and how much compromise one can handle. 

Overall, the decision process includes one’s outlook for both public and private markets in the next few years, liquidity demand, as well as the returns prospect of the entire portfolio.

Compared to peers in the US and Europe, Asian asset owners’ exposure to the private markets is relatively small and has only started to grow in the past few years.

ALSO READ: Asian pension funds see steady increase in risky assets while playing catchup with the West

“Across Asia, the likes of Singapore’s GIC and Temasek are relatively more sophisticated in the private markets. Other than them, the rest are still too green to know the right way to manage their alternative portfolio under the current market environment,” a Southeast Asia-based senior investment executive with a large American fund house told AsianInvestor.  

In the past two years, we have seen leadership changes and senior investment team updates, including new alternative investment teams being set up at several large asset owners in the region, such as the China Investment Corporation, the Korea Investment Corporation, and Korea’s National Pension Service. All of them have a target of adding alternative exposure.

ALSO READ: Why Korea's KIC is speeding up alternatives allocation

When the public markets valuation slump transmits to the private markets in the next few months, it would be the time to see whose alternative investment expertise is strong enough to ride through the storm, and who are the ones to suffer, when the 2022 annual results come out next year.

Either way, asset owners need to acknowledge that the good old days are behind us, and managing an alternative portfolio well will take more than simply choosing several renowned managers — their internal expertise will certainly need to catch up as well. 

ALSO READ: NPS to start more in-house management of alternatives and foreign bonds