Customizing Private Markets Portfolios for Success in Asia's Dynamic Market

In the rapidly-evolving investment landscape across Asia today, private markets investors face an increasingly complex set of choices when constructing their portfolios. With a growing variety of asset classes, they have options for diversification beyond traditional private equity, providing greater flexibility whilst navigating the changing macroeconomic landscape and the challenges that come with it. As allocators weigh these new opportunities and challenges, strategic portfolio decisions are crucial for optimizing returns and managing risk in the region. 

LP considerations when customising their portfolios

In today’s environment, LPs are offered a larger variety of private asset classes and a deeper pool of managers from which to select. There are more options now to meet income or distributions-oriented objectives, for example, which would include a greater mix of private credit, infrastructure and secondaries, versus relying just on private equity, which has a longer duration.

In Asia, there are more allocators who are newer to private markets and who have been deploying to private markets for less than five years. This means these investors have more flexibility when it comes to customising their portfolios, and to some extent, have the benefit of a “blank slate” to ensure they are setting a strong foundation for their private markets portfolios without being bogged down by legacy allocations.

At the same time, investors in Asia have traditionally had more home bias, which meant that their portfolios were more likely to have more VC or growth exposure, given the nature of the Asian PE/VC landscape. Investors in the region now have an opportunity to build up more global exposure, which can be more buyout oriented and can serve as a  complement to their current portfolios.

Challenges for LPs

Macro uncertainty and liquidity have been the some of the biggest challenges for LPs. The world is still adapting to a much higher cost of capital after more than a decade of cheap financing. In terms of private markets, this has meant an adjustment of the opportunity set, with credit becoming more attractive in almost every private asset class.

This does not mean that private equity is going away. In past cycles, private equity has seen higher interest rates than today, although deal makers have also been recalibrating the mix of debt and equity in their transactions. In this environment, GPs are looking to hold on to companies for longer and are more comfortable sticking with assets that they are familiar with.

At the same time, IPO markets have remained muted, and as a result investors have seen slowing DPI. This has meant that the secondaries market has never been more active, as both LPs and GPs seek liquidity solutions. That being said, we have also seen an uptick in M&A volumes, especially in the middle market, where larger companies are still looking for opportunities for strategic acquisitions.

Public markets vs. Private markets

From a strategic allocation perspective, private markets have historically  outperformed over the past 15 years, across private equity, private credit and private infrastructure. For investors with a mid- to long-term investment horizon, it makes sense to complement their public markets portfolios with private markets allocations.

Investors should explore all forms of diversification opportunities available to them. Given bond markets have not protected drawdowns in stock markets in recent market episodes, the search for further diversification has never been greater. Private markets offer a different source of alpha and often can provide less correlated returns. As such, we expect to continue to see more investors allocating to private markets or increasing their current allocations, in order to build a more robust investment portfolio.

Managing the denominator effect from overallocation 

Public markets typically  exhibit more price volatility, and the world has more recently experienced a recalibration to a higher rate environment. From a governance perspective, LPs and boards should consider widening their tolerance bands between public and private market allocations, so as not to become a “forced seller” in markets where valuations are more challenged.

At the same time, compared to 20 years ago, allocators have a lot more tools at their disposal to create greater flexibility in their portfolios. The advent of evergreen private market funds allows investors to dial up or down their private market allocations at the margins more easily. In addition, secondaries markets have evolved to better support the private markets ecosystem by allowing investors access to liquidity more strategically and when needed.

Keys to successful portfolio construction

The key building blocks to portfolio construction are returns, risk and liquidity. Portfolios that cater to each investor’s unique requirements in these areas are more likely to be resilient and robust over the longer term.

Investors should be open to using all asset classes and investment tools available to them, including newer fund structures that improve upon existing ones.

At the same time, having access to high quality private markets data and technology enables investors to make informed choices, without depending on over-simplified rules of thumb. Last, but not least, investors need to be patient, committed and disciplined in their approach to private markets, given the longer-term nature of the asset class.