Private debt and real assets are turning into favoured options for institutional investors in Asia, as rising interest rates continue to place upward pressure on financing costs.
Private equity, however, is plagued by vaulation concerns, at least for some institutions.
“In a rising interest rate environment, investing in private debt would generate an appropriate return as the coupon income is typically linked to floating base interest rate, and private debt offers risk mitigation due to its senior position in a company’s capital structure,” said Carol Wong, managing director and head of institutional business development at Ping An of China Asset Management (HK), the overseas asset management arm of Ping An Group.
“Our continuous target is to seek a high-quality, low-risk and diversified portfolio globally across private equity, credit, real estate and infrastructure sectors,” Wong told AsianInvestor.
On Tuesday, US Federal Reserve chair Jerome Powell warned that the Fed could raise interest rates more quickly and higher than expected to stabilise prices.
Luke Browne, head of asset allocation and multi-asset solutions for Asia at Manulife Investment Management, echoed Wong's view, saying that because private credit investment involved a “very specific and in-depth” process of identifying companies that one wanted to lend to, it could offer attractive returns.
“Clearly, on an absolute basis, those returns are going to be higher than they were previously, because risk-free rates are higher," he told AsianInvestor. "I haven't seen much spread compression from private credit yields.”
He said that in terms of asset and liability management for life insurance companies, private credit was an attractive choice among alternative assets due to the fact that it was rated.
It had the longevity needed to cover longer-dated liabilities, and tended to fare well compared with alternatives from a risk-weighted capital consumption perspective, he added.
Meanwhile, Browne noted real asset investment in such sectors as agriculture and timber, alongside private credit investment, could offer potential sources of returns for long-term investors looking for diversification in the private market.
Broadly speaking, he said the weight of alternative investments in total assets could be 10% to 25%. In the multi-asset strategies Browne manages for institutional investors, that proportion is around 15%.
Wong expressed similar views towards real assets, saying that Ping An of China Asset Management (HK) saw a strong appetite for real estate investment opportunities in sub-sectors that benefited from favourable structural trends, such as logistics, multifamily real estate, senior housing and data centres.
“Digital economy-related assets will be our primary focus, especially the key themes of data centres in the US, Europe, and certain markets in Asia-Pacific,” Wong said.
“We will also continue to look for core plus infrastructure opportunities in the telecommunications, transportation and energy transition sectors, primarily in Organisation for Economic Co-operation and Development (OECD) countries,” she added.
Infrastructure assets have shown resilience amid the turbulent economic environment during the past few years, and Wong said her company saw it as an asset class that would outperform in a high-inflation, low-growth macroeconomic environment.
“Our team believes that OECD countries, primarily the US and Europe, present attractive investment opportunities for infrastructure," Wong said. "The macroeconomic backdrop in OECD countries remains robust and relatively stable, driven by strong underlying fundamentals.”
PRIVATE EQUITY PLAY
In private equity investments, the firm said it would continue building a core portfolio of fund investments and further expand co-investments, partnering with high-quality fund managers from the US and Europe.
“We will enhance our diversified and robust portfolio with buyout strategies as core, alongside growth or opportunistic strategies as satellites in the technology, healthcare and industrial sectors,” Wong said.
However, Manulife's Browne viewed it differently.
As public markets took a hit last year, investors eyeing private markets, which usually lag in terms of valuations, are on the lookout for a possible copycat downward trend.
“In the rate cycle that we're in, clearly financing is more expensive," said Browne.
"So, for any leverage strategy – private equity, for example – the costs have gone up. Arguably, in generic terms, that might make private equity less attractive this year than it was last.”