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Asia Pacific institutional investors increase their influence in alternatives market

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Asia Pacific has always been a key market for global alternative fund managers but as the latest research published by Preqin shows, institutional investors in the region are becoming an increasingly important source of capital allocation; both to hedge funds and private equity. 

Hedge Fund Investor Trends

This is good news for local domestic managers and global players with an eye on diversifying their investor base and tapping in to new sources of capital. Based on 494 institutional investor profiles the Preqin October Spotlight report found that Australia (32 per cent) and Japan (24 per cent) are key markets with Hong Kong (13 per cent), Singapore (11 per cent) and Korea (8 per cent) also important allocation providers. 

“It’s a region that we see growing in importance for global hedge funds. When we look at Asian Pacific institutional investors, there is definitely diversification in terms of the types of investors allocating to hedge funds and also the different countries they are coming from. The region is a patchwork of different investor appetites and investment needs,” says Amy Bensted, Head of Hedge Fund Products at Preqin. 

The make-up of Asian investors ranges from superannuation schemes, private and public sector pension plans, SWFs, family offices and FoHF managers through to wealth managers, banks, government agencies and foundations.   

Preqin’s report finds that superannuation schemes and private pension plans have increased their mean allocations to hedge funds from 4 per cent to 5 per cent and from 13 per cent to 15.7 per cent respectively. In contrast, 23 per cent of private wealth managers, 25 per cent of SWFs and 25 per cent of public pension funds are currently under their target allocation; this is interesting in that it reveals the different risk sentiment that exists towards hedge funds in Asia Pacific. 

Geographically, Japan and Hong Kong-based institutions lead the way in fund searches and mandates; 28 per cent and 17 per cent respectively. Indeed, when one looks at current and target hedge fund allocations, Japanese investors already invest 9 per cent of their assets and plan on raising their target exposure to 13.6 per cent.   

“Regulation in Asia Pacific has been well thought through to make it easier for managers to run investment funds and that has encouraged investors. We see a lot of appetite for local managers who know the local Asian markets as well as further afield to US managers which may have an Asia-focused fund. We are seeing more global managers setting up offices in the region not only to attract investors but to develop a better understanding of local markets,” says Bensted.  

In recent years, total AuM of Asia Pacific hedge funds has been largely range-bound and still hovers around the USD200bn mark. Although there have been a handful of local managers who have raised significant assets (e.g. Morgan Sze’s Azentus Capital runs more than USD1bn) it remains a hard slog for smaller Asian managers, which make up the majority of regional managers. 

A lot of institutional capital still goes to large domestic managers or US and European managers. It’s a size game. Institutions can’t allocate to USD20mn to a sub-USD100mn fund as they would be exposed to too much concentration risk. 

Nevertheless, what is encouraging from Preqin’s research is that whilst 54 per cent of regional investors favour global managers, 46 per cent have a preference for Asia-Pacific managers. And why not; they are certainly delivering good performance. The Asia-Pacific benchmark gained 1.82 per cent in Q3, compared to other Preqin regional benchmarks which failed to gain more than 1 per cent. Funds like the Greyhound Asia Fund, a long/short equity strategy, are blazing a trail, up +32.34 per cent through September. 

In addition, seven per cent of all funds launched in Q3 had an Asia-Pacific focus. This suggests that managers are focusing on the favourable supply:demand dynamics developing in the region.

Bensted certainly sees Asia-Pacific’s hedge fund market maturing:
 
“In the US and Europe the industry has had decades to mature, in Asia it’s not been anywhere near that time; 10 or 15 years that we’ve really seen signs of expansion. It’s reassuring that Asian institutions are looking at local managers. They want the ability to find good managers on their doorstep. There are a lot of small funds out there but if they really want to grow they need to attract this institutional money; that’s been a difficulty over the last few years.”

Bensted estimates that there is a lot of money coming out of China, and will continue to grow, “but certainly Japan and Australia are well-established markets of hedge fund allocation. Their appetite has flip-flopped, especially post-crisis. These are conservative investors but their populations are living longer and they need hedge funds to help grow their assets. 

“It’s good for the Asia-Pacific market and the global hedge fund market at large that Asian investors are getting switched on to hedge funds. More diversity in terms of where the money is coming from is good for the industry; it’s a positive development and we expect it to benefit both investors and managers in Asia Pacific,” opines Bensted. 

In terms of strategies, investors are looking not only at the liquid end of the scale with long/short equities etc., but also at the more illiquid end of the scale in strategies such as private equity.

Private Equity Investor Trends

This segues nicely to looking at the growing sophistication of Asia-Pacific’s private equity markets. Without doubt, local investors are viewing private equity as an important asset class. Preqin’s latest Asian Private Equity special report, published in September 2014, surveyed 50 Asian LPs, of which 91 per cent responded by saying that they believed private equity was of growing importance to their portfolios. 

“This survey gives some indication of the importance and potential growth of Asia’s PE market. As we’re seeing with PE globally, this asset class is becoming a more important part of investors’ portfolios. As a strategy, private equity continues to outperform other markets and Asian investors are not going to sit back and ignore that,” comments Christopher Elvin, Head of Private Equity Products at Preqin.  

There are currently 353 Asia-focused funds targeting USD113bn of aggregate capital. Among the global PE investor base, at 544 Asian LPs currently only represent around 10 per cent. This suggests that Asia could be a key source of capital for global PE houses moving forward. 

“I think more than anything else the private equity fund raising environment is more competitive than ever and from a capital sourcing perspective the surface has only just been scratched in Asia. Over time we will see more Asian LPs as interest in the asset class continues to grow. Investors reportedly have specific regional or Pan-Asian preferences at the moment; global managers will have to respond to that accordingly,” says Elvin.

In terms of investor profile, China, Japan and Korea dominate the space accounting for 62 per cent of all Asian LPs. However, regions like ASEAN, an economic alliance of countries including the likes of Thailand, Indonesia, Philippines and Singapore, and South Asia, which contains the Indian sub-continent powerhouse, will increasingly become an important focus both for investors and PE managers. 
 
“There’s still a growth period to come. There was an initial boost to growth in the Asia-Pacific between 2009 and 2011 following the financial crisis and then capital rebalanced itself a bit more towards Europe and the US but the indications are that, when one looks at deal flow and the number of funds closing, things are back on track in Asia. We’ve seen large placement agents opening up offices in Asia over the last couple of years, which is another indication of the potential to source additional LP capital and expand their client base,” comments Elvin.

One sign that Asia-Pacific’s PE market is maturing and that investor interest is building is that whilst the number of funds closed is down on last year – 87 funds compared to 181 funds between 1 September 2013 and 2014 – the aggregate capital raised is rising; USD35bn compared to USD26bn. 

“There is clearly strong investor appetite in Asia from a demand perspective. Looking at China, the relaxation of regulation for LPs is going to be a good sign based on the amount of capital that could potentially be put to work by insurance companies. It’s not going to be long before these institutions start to allocate capital. 

“I’m confident that the total aggregate capital raised in 2014 will surpass what we saw last year,” states Elvin.

From an investment opportunity perspective, Piau-Voon Wang, Partner, Adams Street Partners, told Preqin in its special report: “I believe China, India and ASEAN continue to be the most vibrant and biggest growth-oriented markets. Other than technology, healthcare is one area which is on the rise in China due to reforms sweeping the country. India has the highest rate of growth in mobile phone users, which has created opportunities regardless of the macro malaise. The financial services and infrastructure arenas are also worth watching as India has an enormous need to address its infrastructure deficit.”

Another sign of deepening maturity in the region is by looking at average deal sizes. If one looks buyout funds, the average deal size is USD214mn YTD compared to USD120mn on average in 2013 and USD97mn in 2010. 

“The market is moving away from growth funds towards more niche strategies such as debt and secondaries. It shows that investors are becoming more mature and sophisticated in how they allocate their capital. Over time we will see more Asian LPs as interest in the asset class continues to grow. Investors reportedly have specific regional or Pan-Asian preferences at the moment; global managers will have to respond to that accordingly,” adds Elvin.

Whilst the number of growth funds that have closed is much higher than that seen in buyout funds – 71 compared to 23 – the aggregate AuM raised by these buyout funds is higher; USD28.1bn compared to USD15.8bn. 

“There’s a lot of talk among fund managers about how competitive pricing has become and whether companies are starting to get overpriced; that higher average deal size might be a reflection of this,” says Elvin.

Such is the potential for Asia’s private equity market Preqin makes a prediction that the industry will see an Asia-based top 20 firm within the next five years.

“When you look at the longer term macroeconomic factors the region is still undergoing massive urbanisation and industrialisation and there are very favourable investor demographics. If one or two local PE managers can maximise the opportunity set we believe that can happen and they’ll become market leaders alongside well known US and European PE names,” concludes Elvin.

Please click the following links to read Preqin’s latest October Spotlight report and its September Asian PE report
 

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