THE alternative investment market in Asia is set to experience explosive growth in the coming years.
With the region’s increasing economic dominance on the world stage, investor demand to access this fast-growing and diverse market is expected to remain robust.
According to Preqin, private capital assets under management (AUM) targeting Asia could reach US$6 trillion (RM24.9 trillion) by 2025, representing a compounded annual growth rate of 28.3% from 2020.
“The continent is home to a very diverse range of economies at various stages of development, market sophistication, and innovation – all are in need of public and private capital to the tune of ever-larger sums, ” says Mark O’Hare, founder and CEO of Preqin, which specialises in alternative assets data, tools and insights.
He acknowledges although the ability of international institutional investors to deploy capital in the region has historically been limited by several structural challenges, many of the structural challenges to deploy capital will likely ease, going forward, subject to the resolution of current geopolitical tensions.
In its first-ever comprehensive “Alternative Assets in Asia-Pacific”, Preqin notes that Asia-Pacific-focused private capital AUM expanded almost six-fold over the past decade, reaching US$1.71 trillion (RM7.09 trillion) as of September 2020, with US$133bil (RM551.22bil) raised in the first nine months of 2020 alone.
Along with US$156bil (RM646.54bil) held by Asia-Pacific hedge funds as of the fourth quarter of 2020, the alternative investment industry in the region looks well on its way to hit the US$2 trillion (RM8.29 trillion) milestone in aggregate assets.
“These growth trends reflect far more than international investors’ continued search for returns and diversification opportunities for their global portfolios. Indeed, Asia-Pacific has been an engine driving global growth for more than a decade now, ” O’Hare says.
The report also indicates that Asia-Pacific-based private capital (excluding hedge funds) dry powder held by fund managers sits at a record US$446bil (RM1.85 trillion) as of April 2021 – up from $416bil (RM1.72 trillion) in December 2020. The majority (77%) of this capital ready for deployment is held by private equity and venture capital (PEVC) fund managers in the region, followed by real estate (10%).
O’Hare points out that while Asia-Pacific’s growth story thus far has been largely dominated by China, the region’s emerging markets – from South-East Asia to South Asia – are rising to be the catalysts for many growth trends; and investors are taking notice.
Preqin notes expectations of South-East Asia’s rising role as a key source of economic growth in Asia have grown markedly in recent years. The region has one of the fastest-growing populations globally, a rapidly expanding middle class and one of the highest digital penetration rates in the world, it says.
From a macroeconomic perspective, there is an accelerating need for capital across South-East Asia to fuel innovation and development, as global commerce and supply chains diversify away from China.
For instance, over the past two decades, foreign direct investment (FDI) in Asean has increased steadily from around US$22bil (RM91.18bil) in 2000 to a record US$161bil (RM667.26bil) in 2019.
“If there were ever a perfect time for the stars to align and private capital to register a region’s potential, South-East Asia’s moment may have already arrived, ” Preqin argues.
According to Preqin, Asean-focused PEVC industry’s AUM had almost doubled over the last five years to a record US$33bil (RM136.77bil) as of September 2020, including US$13bil (RM53.88bil) in dry powder, or capital available for deployment.
It reckons while the Covid-19 pandemic has put a damper on fundraising activity in 2020, it has also accelerated ongoing digitalisation trends to a record pace, representing a likely boon for fund managers looking to access emerging opportunities in the region.
“We expect fundraising to recover as the path out of the pandemic becomes clearer around the world. In fact, fundraising activity as of April 2021 (US$1.3bil or RM5.39bil) is already close to surpassing last year’s sluggish turnout (US$1.4bil or RM5.8bil), highlighting the early start to a more active capital raising environment this year, ” Preqin says.
In 2020, Asean saw the completion of 400 venture transactions valued at a combined US$8.2bil (RM33.98bil).
Despite the uncertain deal-making environment brought on by the pandemic last year, the sum was the second-highest figure in the past 10 years, and just shy of the record US$8.8bil (RM36.47bil) traded in 2018, Preqin points out.
It notes the composition of private equity deals in Asean has been dominated by consumer discretionary and information and communication technology deal activity, and this will likely continue to be the trend going forward.
This is especially so when taking into account the significant proportion of total private equity industry AUM targeting Asean-held by growth funds – which typically target faster growth companies.