High inflation and elevated borrowing costs are dampening the attractiveness of leveraged private-market investments, but institutional investors across Asia-Pacific are still determined to increase their allocations in private assets, especially in real estate and private debt, US-based financial services firm State Street said.
According to an annual report published on Monday by the firm, among the 120 Asia-Pacific-based institutional investors it surveyed, 58 per cent expected inflation to continue to rise in the region, while 65 per cent said elevated borrowing costs linked to high inflation could pose “a key challenge” to the return of leveraged private-market investments.
Despite these macro headwinds, financial institutions across the region are still optimistic about private markets and said they are planning to increase allocations in the short and medium terms, with private debt emerging as a clear winner.
“Private debt is the most appealing [asset class] to Asia-Pacific investors, with 78 per cent planning to increase their allocations in the short term,” said Eric Chng, global head of hedge commercialisation at State Street.
“We have seen high levels of dry powder and a marked slowdown in deal flows, which indicate that valuation gaps between buyers and sellers still persist. In an attempt to seek alpha in a crowded marketplace, investors have increasingly been exploring fresh market niches,” he added.
Moreover, the survey showed that across Asia-Pacific, just under half of institutional investors are allocating more than 30 per cent of their portfolios in private markets. About 60 per cent said that they would raise their allocations to this level over the next three years.
“Private assets already are and will become even more important in institutional investors’ portfolios,” Chng said. “The great rotation from public to private assets within portfolio allocations is expected to continue in the coming years.”
Real estate, another major subcategory under private assets, is also gaining traction among Asia-Pacific investors, with 64 per cent saying they expect to grow their holdings over the medium term. This is probably being driven by expectations that China’s real estate market, which has suffered from policy-linked contractions and liquidity problems, will “return to growth” over time, the report said.
China’s property stocks, especially those of developers facing liquidity issues, went up by 20 per cent on average on Monday, on the back of moves by municipal governments to further ease housing purchase restrictions and speculation on social media that policymakers could weigh in to purchase completed projects through local government financing vehicles.
However, analysts at CGS International Securities have questioned the sustainability of the upturn, saying that demand-side stimulus could not solve the sector’s problems “holistically”, while the local government rescue plan would require policy banks to inject at least 1 trillion yuan (US$138 billion) to 2 trillion yuan “to make the impact more meaningful”.
The optimism towards real estate in Asia-Pacific stands in contrast with other parts of the world, especially North America, where most investors are expected to divest from this asset class in the long term.
Furthermore, Asia-Pacific investors are less interested in infrastructure and private-equity investments compared with their global counterparts, with 63 and 64 per cent in Asia saying they would increase their holdings in the two segments over the next two years, compared with 71 and 67 per cent globally, respectively.
The State Street survey also identified the main challenges and priorities for Asia-Pacific institutional investors in the current environment, with 47 per cent of the respondents saying they found it difficult to determine their public and private market positions “together under a whole portfolio view”. Another 32 per cent said the ability to manage all their portfolio data in one place would be “transformational” for private-market businesses.
Despite the macroeconomic challenges and nuances across regions and sectors, the bottom line seems to be that there is a global shift from public to private asset investment on the back of regulatory support.
“Institutions are likely to reduce public market allocations to fund increased private market investment, with private markets set to make up nearly half of the average portfolio by 2028,” the survey said, citing fund managers.