A majority of investors have been looking to increase allocations to alternative assets, due to poor investment returns last year as well as increasing government pressure to invest more domestically, where investment and forex risks can be more controlled, according to a report from Cerulli Associates.
Their findings come as liquidity conditions for asset owners have improved in the last six months, on the back of a recovery in the public equity debt markets, Cerulli details.
The research house points out that private credit has been one of the most popular segments of the alternatives market in Asia, particularly in the last 18 months, due to its “inflation-protected floating interest rate feature as well as its provision of enhanced interest rates versus public fixed-income opportunities”.
It adds that while the interest in private equity remains for the long term, many investors in Asia seemingly believe that the lofty valuations originating from the 2020–2021 investment cycle have not been adjusted downward.
Conversely, venture capital performance did not reach the expected levels as funds were rapidly deployed and the valuation of the portfolio companies reached unrealistic levels, Cerulli’s report indicates.
The research house also notes reduced investment demand for real estate. Concerns have emerged from commercial real estate exposures in the US, despite the high occupancy levels there. However, Cerulli notes that Asian commercial real estate has been healthier due to low vacancy rates.
Meanwhile, it points out that exposure to hedge funds has also fallen across the region, due to poor performance and many institutions paring down risk assets for regulatory adjustment. Infrastructure remains popular, given its inflation-tracking long-term income-delivering features, it adds.
Going forward, conservative and careful selection is needed, particularly when investing in private credit and private equity, according to Soo Ah Ran Cho, associate director at Cerulli.
“The next 12 months may reveal increased risk factors for some private credit issuers and private equities. Private equity valuations are due for downward adjustment due to inflated valuations in 2020–2021,” she said.
“As for private credit, with the current high-interest-rate environment, there might be higher delinquencies in the next 12–18 months given that many issuers will have difficulties refinancing once their principals are due.”
