Increased professionalisation of portfolio management across Asia’s family offices and private banks has paved the way for a new set of alternative investment strategies aimed at the next generation of clients.
Traditionally the domain of institutional investors, private assets are the latest hot investment topic for Asian wealthy investors and family offices. But this time it may be more than just a fad.
The huge intergenerational wealth transfer, with an estimated $2.5tn in assets to change hands by 2030 according to Wealth-X, is driving Asian families to look beyond fast gains, now focusing on the longer term.
The proliferation of new services and strategies is playing to this trend, as Asia’s portfolio management community becomes increasingly professionalised and sophisticated, particularly when it comes to alternative investments.
Not only is a wider range of solutions and product offerings flooding private markets, but investors — wary of increasingly unpredictable bourses — are also growing more aware of the importance of risk management.
Portfolio diversification, uncorrelated and enhanced overall returns are “key benefits” of investing in private assets, says Hui Yang Goh, head of alternative investments, Asia at Pictet Wealth Management, speaking at the Wealth Management Summit Asia, held in Singapore.
“We see increased appetite, curiosity, especially on the private side, partly driven by the realisation that returns across asset classes are generally on a downward trend,” says Ms Goh. The huge interest rate rise shock made 2023 a challenging year for the private equity industry.
But with interest rates declining, investors could look forward to “outsized double-digit returns” in private assets, with historical performance showing that vintages generate “superior returns” when markets are slowing down. “This is a good time to consider private assets,” she believes.
Private markets need to be thought of as complementary to public markets, according to Pictet. “Investing in private markets allows investors to participate in the significant value creation, happening in the exciting world of innovation technology, for instance, which cuts across all industry sectors, it is pervasive,” states Ms Goh.
Private investments can generate 300-500bps additional returns per year over public market equivalents, says Albert Yang, head of alternative investments for Asia at JP Morgan Private Bank. But family offices and private clients need to be able to commit capital over the longer term to participate in private investments, in exchange for higher returns. The global bank advises families with “the right liquidity and risk profile” to replicate the longer-term “endowment-style investment approach”, typically including a higher allocation to alternatives.
Manager and strategy selection are key differentiating factors for generating future returns. Return dispersion between the top quartile and bottom quartile private equity managers can be 20 per cent plus on a yearly basis, says Mr Yang.
This is true even with the “more recent phenomenon” of semi-liquid solutions. While many wealth management platforms offer such strategies, this is “far from being a commoditised area” despite the similar return profile, he adds. Details such as investment strategy, structure and tax treatment can still create “significant return differentials” among managers.
Semi-liquid solutions
Shorter-term, more liquid solutions are what wealthy clients prefer in Asia, reports Mr Yang. Semi-liquid solutions can be considered as a supplement to traditional fixed income-like investments. For income-oriented semi-liquids, the underlying assets should be higher-quality, including infrastructure, commercial real estate, and private credit. Thematic areas such as technology, renewable energy and healthcare also appeal to clients, he says.
“Clients are very interested in semi-liquid solutions,” agrees Shafali Sachdev, head of investment services, Asia, BNP Paribas Wealth Management. These instruments “democratise” the space, with investors generally understanding the trade-off they make between liquidity and higher returns.
They also appeal to clients concerned about volatility and seeking “more stability” in their portfolios. But is smoothness in portfolios deceptive?
“The only kinds of investments investors should make should be with managers they trust,” says Ms Sachdev. “For markets that don’t necessarily trade every day, and don’t have a price every day, investors should still be able to trust the price. And if they don’t trust it, then they shouldn’t be investing in the first place.”
The Blackstone saga, with huge client withdrawals forcing their flagship real estate fund to limit redemptions, demonstrates the value of investor education.
“It is important that investors understand what they’re buying that it’s not liquid or illiquid, it’s semi liquid, so there is an opportunity to get access to liquidity, but there are gates to it,” says Gustav Segerberg, head of business development at private equity firm EQT Group. The model ensures the structure does not need to “fire sell” assets, protecting existing investors, similarly to other structures such as in hedge funds.
Moreover, he says, it is important to grow an investment vehicle responsibly, and ensure diversification.
Another key issue is how to build trust with wealth managers and clients. While institutional clients are comfortable with private asset managers and their processes, “in the private wealth world we need to build that trust in the valuation processes and in the way we do things, and that’s important for the market as a whole,” adds Mr Segerberg.
Private practice
When investing in private markets it is crucial to analyse the illiquidity premium — the extra return needed to compensate investors for tying up capital in less liquid assets — and distinguish between tactical versus long term investment, says Wee-Kiat Tan, co-CIO and head of discretionary portfolio management at Morgan Stanley Private Wealth Management Asia.
“One of the biggest challenges of investing in private assets is that every client is long term until they are not long term. We also need to be very careful about how we allocate to illiquid investments because the ability to exit is still a challenge, but it’s getting better and better.”
However, the variety of illiquid assets has expanded significantly over the three to five years, with a huge increase in spectrum of products available. Investors are familiar with private equity, but not with private credit, for instance, he says. Together with infrastructure, private lending and real estate, there is an increased opportunity for investors to diversify within the asset class.
“We expect demand for alternative investments to continue growing in Asia,” states Michael Blake, Asia CEO at UBP, adding that a third of UBP clients eligible for private market investments currently have “some form” of exposure.
Private banks that provide a differentiated service within this asset class are “well placed” to capture a larger market share, he says, explaining that dispersion of returns between top-performing and lower-performing managers is 10 times wider in private markets than in public markets.
Private equity secondaries, which offer investors a path to early liquidity, offer today attractive valuations, he believes, also highlighting the ‘dry powder’ on the sidelines, with between $2-$2.5tn waiting to be deployed.
“We see strong interest from clients in secondaries,” pointing to asset backed finance, and to a certain extent, infrastructure, supported by megatrends. Within digitisation, for example, data is the new sort of “global commodity”, he says.
Entrepreneurial spirit
Private market investment opportunities suit Asian families and family offices from more than just an investment perspective. In Asia, family businesses dominate the business landscape, and the originator of wealth is still playing an influential role in the investment decision making.
But with increasing professionalisation of private wealth and rising numbers of family offices, especially in Singapore, there is greater involvement of next generations in investment decisions. This is bringing longer-term thinking and “more clarity” about the role of private markets in portfolios, believes Ping Ping Lim, vice-chairwoman, global family wealth Apac at LGT Private Banking.
The founding generation has a strong desire to preserve the entrepreneurial spirit in the next generations. And risk taking is a key entrepreneurial trait. “With a younger generation now taking on roles in their family office, we are seeing families working together to assess risks and opportunities presented by private market assets, particularly private equity and venture capital,” she adds.
Next generations are also driving the shift from venture philanthropy to impact investing. “It has been very interesting to see how Asian families’ traditional inclination towards philanthropy has evolved into a growing interest in investing in climate, health, and education solutions,” she says.
This value-based action and response to ecosystem challenges is motivating families to explore innovative financing instruments, such as blended finance which combines commercial investment with concessional capital. These instruments can be structured as equity investments, loans, guarantees, all areas in which Asian families would find familiar territory through their investments in private markets.
“When the Singapore government announced policy measures to encourage families to use concessional capital and grants in blended finance models through tax incentives, Asian families with links to Singapore suddenly started talking about climate philanthropy,” says Ms Lim.
“This is a remarkable shift in thinking and risk assessment from a values-based perspective.” Families do not have specialist skills in their office and are looking for those partners, “whose judgement they trust” rather than just sourcing deals.
The trend to private markets and impact investing is also supported by the fact that younger cohorts are better educated, have improved networks, travel, and study overseas, learning from more professionally managed Western family offices, says Pictet’s Ms Goh. “Younger generations focus not just on returns but also on impact, sustainable financing and enabling technologies. Elderly generations are more comfortable with traditional assets, but younger ones are nudging them, and patriarchs and matriarchs are giving them more room, allowing them to shape portfolios.”
Greater transparency
Jean Chia, global CIO, Bank of Singapore points to the importance of “patient capital” to support innovation in the current phase of industry developments. “As a late adopter of the private markets and very much in favour of transparency and liquidity in the past in my history of investing, I now see the value of private markets, value in tolerance for illiquidity,” she acknowledges.
She emphasises, however, that the role for private banks, must be in the “happy middle”, able to manage managers as well as client return expectations.
“My pet peeve for private markets is lack of transparency,” she says. “We should hold managers to the same bar we do for those in the long only or hedge fund space, where we require more transparency and return expectations, and risks, to be realistic.”
But not all market participants believe this lack of transparency to be an issue. Brian Lim, partner at Pantheon Ventures, praises the governance model in private markets as being about engagement, sitting on companies’ boards, and actively adding value.
The key hurdle for many platforms setting up today is providing information to the wealth space, making sure they “do not dilute” that institutional experience in private markets that has been so well established and successful, he says.
“The challenge going forward is how we provide that to retail or wealth customers, how do we replicate that, so that we don’t have a mismatch in terms of expectations of retail and wealth costumers,” says Mr Lim. “But with the wealth of expertise and platforms coming into the market, that’s something that I have high conviction is going to be met quite nicely.”
The comments of Michael Blake, Jean Chia, Hui Yang Goh, Ping Ping Lim, Brian Lim, Shafali Sachdev, Gustav Segerberg and Wee-Kiat Tan are taken from their panel discussion contributions at the recent PWM & FT Live Wealth Management Summit, Asia held in Singapore.