Asian Private Capital Hunts for Global Assets

RBC's Andrew Gordon sees Asia as sophisticated capital source

Asian private institutions are joining a global safari for an increasingly elusive prey: strong returns in a low-interest rate environment. These sophisticated players from East and Southeast Asia are jostling for investment space, as private capital firms from North America and Europe once again search further afield for yields.

Key insights

  • Asian growth fuels investment in private and public markets globally.
  • Asian private entities' hunt for yield raises risks for global players, something eyed by both the IMF and the Bank for International Settlements.
  • Due to their growing presence, Asian institutional investors are becoming big swing buyers in some markets.
  • China is a relative no-show in the great private asset hunt, with its domestic economy facing headwinds.

Asian insurance companies, pension funds, and banks—from Japan to Singapore—are making their presence felt around the world, buying debt, real estate and infrastructure projects. Their acquisition portfolios stretch from Australia to the Americas.

The largest economies from the region control $28 trillion in foreign financial assets, a leap of $8 trillion in just seven years, according to the International Monetary Fund (IMF) and other data sources.1 These gains are exploding from institutional investment, rather than central banks.

“Asia is increasingly important to the asset management community both as an investment location and a source of sophisticated investor capital," said Andrew Gordon, Managing Director, Asia for RBC Investor & Treasury Services.

Asia's growth fuels spree

The rise of its middle class and an increase in high net worth individuals are helping to fuel Asia's expansion.

“The rapid pace of economic growth in Asia has enabled many countries to build their foreign currency reserves, and those are being actively invested into public markets—for both liquidity and return—and also into private assets," Gordon said. Savings are increasingly being channeled into the investment markets, and part of that makes its way into private assets.

The private market cavalcade, a global phenomenon, came roaring back to life in 2021 after hitting the pause button during the initial period of COVID-19. The sector is forecast to continue booming in 2022, fueled by the need to realize strong yields and further boosted by government stimulus.

The Asia-Pacific region is expected to be the life of the private asset party, growing at a “world-beating" 25.2 percent annually through to 2025, according to Preqin, the London-based data and analytics company.2

The Asia-Pacific region is expected to be the life of the private asset party

“There has been a massive increase in private assets owned by large Asian institutional investors," said Gordon.

The largest operators, such as the GIC and Temasek in Singapore, structure and arrange their own deals, often with other sophisticated asset owners such as the Ontario Teachers' Pension Plan and the Canada Pension Plan Investment Board, according to RBC's Gordon. They also co-invest with private equity funds and real estate managers.

Asia will see the fastest growth in ultra-high net worth individuals in the next five years, according to a report by Knight Frank.3

Frenetic pace?

The hunt for private assets on a global scale does raise concerns.

Fund managers are working at a frenetic pace that could imperil returns down the road as the window for due diligence narrows in competitive markets. Others worry that monetary tightening in the West will dampen the party.

Asset buying from rich nations such as South Korea, Taiwan and Singapore adds risk to U.S. dollar flows, something that has caught the eye of the IMF and the Bank for International Settlements.1

Asian private acquisitions can also have big impacts in markets such as Australia where funds have been active. All this has broad implications for Western asset acquisitions, especially if China's institutions enter the fray.

Private assets are generally harder to sell, possibly posing liquidity issues and adding stress to cross-border currency flows

The hunt for yield by Asian private entities heightens risk if the investors need to raise cash—and the assets prove difficult to unload. Private assets are generally harder to sell, possibly posing liquidity issues and adding stress to cross-border currency flows.

"High yield brings high risk and buying higher-risk fixed income investments in a rising interest rate environment can lead to an increase in default rates," Gordon said. "Investors need to be cautious given the competition for yield, the early stage resurgence of inflation and the 'dry powder' that the private asset industry has at its disposal."

The China conundrum

China is a relative no-show in the recent great private asset hunt. Chinese firms used to be big buyers of trophy assets overseas, but that has slowed—for political and economic reasons.

Analysts say a move to foreign assets in China would require the easing of its capital controls, but even a small opening would result in potentially large investment flows abroad.

Outside of China, Asian institutions are on the march for private assets, looking for yields to meet the promised returns for their investors and stakeholders. There are risks for global financial flows if the private outfits stray too far into illiquid assets.

Asian investors, however, generally do not go it alone in the West. They often invest in funds managed by professional managers to "give them geographic diversification into markets where they have less hands-on knowledge," according to Gordon.

"And there is plenty to go around," Gordon said of this type of investment vehicle.

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  1. The Economist (January 15, 2022), Super Savers
  2. Preqin (November, 2020), The Future of Alternatives 2025 
  3. Knight Frank (March 1, 2021), The Wealth Report