Asia is an increasingly important source of capital for private equity funds, with large state-owned investors leading the pack
Asia is an increasingly important source of capital for private equity funds, with large state-owned investors leading the pack
Private equity is the fastest-growing asset class in the global alternative assets universe, and Asia-based LPs are driving this surge in capital inflows. Investors in Asia accounted for 15% of total private equity capital invested as of October 2020, up from 8% in 2016, as Fig. 1 shows.
Although Preqin’s coverage of new private equity investors in Asia has expanded considerably in recent years, contributing to some of this increase, growth in total assets managed by Asia’s largest allocators is what’s really moving the needle. Our data shows total capital invested in private equity by Asia-based institutional investors has risen by 222% since the end of 2016, to more than $653bn as of October 2020.
Sovereign wealth funds are the most aggressive deployers of capital for cross-border investments and the largest allocators; they account for 38% of Asia-based investors’ combined private equity allocations, followed by banks, at 22%.
We take a closer look at the three largest investors in Asia behind the private equity boom:
1. GIC
Singaporean sovereign wealth fund GIC is one of the largest private market investors globally, with a $57.2bn allocation to private equity, according to Preqin Pro estimates (GIC does not publish its AUM). GIC prefers to invest overseas, and was ranked as the world’s most active state-owned investor in 2020, having deployed $17.7bn across 65 deals last year – down slightly from $24bn in 2019 – according to Global SWF.
GIC allocates 13% of total AUM to private equity, within its long-term strategic allocation range of between 11% and 15%, and typically invests at least $50mn or more in each private equity vehicle. GIC actively seeks to co-invest alongside fund managers, and while it has previously made commitments to funds of funds, it will not consider such vehicles going forward. GIC targets an annualized absolute return of between 12% and 13% for private equity.
2. Bank of China Group Investment
Hong Kong-based Bank of China Group Investment (BOCG Investment) is the private equity arm of the Bank of China, one of the four biggest state-owned commercial banks in China. BOCG Investment has an 80% allocation to private equity, or around $34.5bn. BOCG Investment primarily targets opportunities in China but will consider other regions globally, including North America and Europe. It invests in venture capital, growth, and buyout vehicles, and has a typical bite size of between $30mn and $200mn per fund.
3. Hong Kong Monetary Authority
Hong Kong’s central bank, the Hong Kong Monetary Authority (HKMA), is tasked with maintaining monetary and financial stability in Hong Kong by managing its official reserves through a sovereign wealth fund, the Exchange Fund. The Exchange Fund does not invest in local assets, and allocates 6% of its total assets to private equity, with a market value of $34.2bn as of September 2020. The fund began to invest in private equity and real estate in 2009, achieving an annualized IRR of 12.5% since inception. The Exchange Fund is interested in distressed debt, venture capital, and small- to large-cap buyout vehicles, and seeks global exposure with a focus on Asia, emerging markets, Europe, and North America.
Separately, HKMA announced last year that it will be seeking private equity managers for a new $2.82bn growth portfolio for its Future Fund, which will initially focus on investing in Hong Kong’s property and technology sectors.
In 2021, we expect Asian LPs to keep looking beyond their domestic markets for alternative investment opportunities as yields from safer bonds remain at historic lows.
During the release of the Exchange Fund’s 2020 investment results on 27 January, HKMA Chief Executive Eddie Yue outlined how the current economic environment poses significant challenges to its substantial bond holdings: “Low interest rates will have significant negative impact on interest income from bonds. Furthermore, the limited room for further decrease in bond yields (i.e. rise in bond prices) will also significantly weaken the effectiveness of risk diversification in the portfolio mix of bonds and equities during market turbulence.”
The investment case for private equity, and other asset classes that have low correlation to bond and equities markets, remains as strong as ever – and LPs in Asia have the firepower to act on that.