The Land of Alts Opportunities

The U.S. is losing its title as the world’s best hunting ground for alternative investing, according to a recent report by data provider Preqin.

Emerging markets will offer the best opportunities in 2023, fund managers told Preqin in a survey. The U.S. will slip to the second-most attractive region as its dominance in the global economy declines. 

Emerging markets — which have larger and younger workforces than their developed counterparts — will represent half of global economic growth in the next 20 years and likely more than half of alternative asset growth, Preqin predicted in the report.

The price is also right. Developing regions generally offer a valuation discount versus developed markets, which appeals to asset managers worldwide.

“A valuation-driven process works well in emerging markets,” said Ragavan Sivanesarajah, a portfolio director at Australian real estate specialist Fortius Funds Management, in the report. “The key advantages for investing in emerging markets include higher yielding investments combined with lower financial gearing.”

The alternative assets industry — including private equity, real estate, private debt, hedge funds, infrastructure, and natural resources — will expand to $14 trillion by 2023, Preqin estimated. India, China, and the rest of emerging Asia are gaining the most newfound interest from investors, the report said.

Among investors looking to put money to work in developing economies, 33 percent told Preqin in a survey that they plan to start investing in India in the next five years. Emerging Asia — which excludes India and China — drew the next biggest pool of first-time investors, with 27 percent signaling their intention to allocate.

China, the world’s second largest economy after the U.S., is poised for the biggest growth from existing investors, according to the report. Twenty-three percent of investors surveyed by Preqin plan to increase their exposure to China, compared to 13 percent each for India and the rest of emerging Asia.

“We are seeing the emergence of Asia as a source of long-term and scalable capital for closed-end funds,” said Gianluca D’Angelo, head of Europe, the Middle East, and Asia for Eaton Partners, in the report. “Increasingly, we are seeing managers incorporating Asia into their pre-marketing roadshows to develop relationships and build their footprints.”

Institutional investors in Japan have started to invest “in size” in the region as they hunt for yield after years of ultra-low Japanese interest rates, D’Angelo said. He also pointed to Korea, Taiwan, and Malaysia as adding to Asia’s increasing share of assets.

[II Deep Dive: Sovereign Funds Carve Out More Room for Alternative Assets] 

According to consulting firm Cerulli Associates, Asia’s pension sector will probably lead institutional asset growth as governments speed up reforms supporting retirement savings.

Investable institutional assets in Asia, excluding Japan, rose almost nine percent last year to $14.8 trillion, more than double the growth rate in 2016, Cerulli said in a recent research report. 

“All markets grew their assets, with Hong Kong, Thailand, Indonesia, India, and China recording double-digit increases during the year,” the consulting firm said. “Asia presents an attractive opportunity for financial institutions to step in and fill the retirement income gap as governments struggle to fund their public pensions.”