Asia

GONE FISHING FOR ASIA’S ‘WHALE’ INVESTORS

Large institutional investors in Japan and South Korea are increasing their overseas private equity exposure but the process has been slow. A booming private wealth market could be quicker

At some point this year, Singapore is expected to overtake Switzerland as the global centre of private wealth. Hong Kong is not far behind.

Globally, Asia is set to see the largest rise in the number of ultra-high net worth individuals with growth of 39%, led by Indonesia and India, according to Knight Frank’s latest Wealth Report. In China, too, recently minted tech billionaires and real estate tycoons have been setting up family offices outside the country to safeguard their wealth.

For more than 20 years, private banks from Europe and the US have been using feeder vehicles to steer growing chunks of Asian wealth into private equity funds. HSBC’s private bank arm raised a record USD 3.2bn for alternative investments from its clients globally last year, a jump of nearly 40% from the previous year. Almost USD 2bn of this was from clients in Asia.

More recently, fund managers have been expanding their relationships with pension funds and institutional investors in the region to concentrate on private wealth too and in October Apollo hired Edward Moon from HSBC as head of Asia Pacific for global wealth in Hong Kong.

The key to unlocking these rising private wealth allocations, according to Simon Jennings at HarbourVest, is a more liquid investment mechanism that caters to major changes in the clients’ personal circumstances.

To tap into Asian’s pension funds – sitting on billions more in AUM due to shifting demographics and rising salaries in the region – there is another challenge: relationship management.

Lip service

It is generally estimated that around 25%-30% of a global private equity manager’s AUM should come from Asia, far behind North America and Europe.

Asia’s largest pension fund allocators

Country Plan name

Japan South Korea Japan Government Pension Investment Fund National Pension Fund NPS Corporate DB

Malaysia KWSP EPF

Japan South Korea Hong Kong Taiwan Thailand India South Korea Thailand Corporate DC Corporate pensions

MPF schemes Statutory corporate DC plans LPA SSF bene t fund old age and child allowance National Pension System Corporate pensions Government pension fund

Plan type

Government de ned bene t DB Government DB Government DB Mandatory de ned contribution DC Corporate DC DB

Current asset size (USD m)

Mandatory DC Mandatory DC Government DB Government DC DC Government DC

“Every GP is keen to raise more money from Asia... but I don’t think you’re going to get much more than 35% of AUM [from Asia] without a serious commitment,” says George Maltezos, a partner at Campbell Lutyens, based in Hong Kong.

It is no easy move. Most US or Europe-based GPs don’t want to come to Asia twice a year, open an office or employee a local team that speaks the language, say placement agents.

“Building partnerships in Asia is no easier than elsewhere. It takes time and commitment. Often [GPs] want the billion dollars first, and then they want to make the commitment – rather than the other way around,” he says.

For many of those that have made the commitment, the fundraising process has been long and slow – made even more so by COVID-19 and international travel bans.

“Asia is very, very difficult this year because beyond any other market, it’s heavily relationship driven,” says Sunaina Sinha Haldea, global head of private capital advisory at Raymond James. “They have to meet you, see you, touch you, feel you for long periods of time. The common anecdote in the market is it can take three years to get a cheque out of a Japanese investor, because that’s how long it takes them to get comfortable with you.”

Asian pension funds’ allocations to alternative assets showed only a modest increase of 0.6% from 2019 to 2020, and there is massive disparity between large pension funds in Japan and South Korea – knowns as the ‘whales’ – and others in the region.

Japan’s GPIF is more aggressively pivoting away from equities to alternatives, and pockets of institutional capital in Thailand and Taiwan are turning to private equity too. One example is Taiwan Life Insurance which last year allocated EUR 25m to InfraVia Capital Partners’ InfraVia European Fund V, after investments in IFM Global Infrastructure Fund and with Canadian pension fund CDPQ.

But Korean pension funds are still far ahead of their Asian peers with USD 101bn invested in private markets in 2020, accounting for 11% in their portfolios on average, up 0.9%, according to Mercer’s Asset Allocation Report 2021.

In Korea and Japan, understanding each country’s regulatory landscape is key, say managers and advisers working in the region.

Open gate

In Japan, professional ‘gatekeepers’ must be appointed before allocations can be made into private equity funds. In Korea, the passing of a reform bill for the Capital Market Act, coming into effect last year, will allow Korean private equity managers to provide an extended pool of investment structures and terms to investors. The reform will have a positive impact on Korean institutional investors’ overseas investments, which has traditionally targeted on real estate and infrastructure, said Preqin last year.

“When you look at the Japanese or the Korean market, they’re very active domestically,” says Maltezos. “In Korea, there’s a symbiotic mentality that goes on. No small Korean pension fund is going to stick their neck out and invest in private equity in complete isolation. In some aspects, the regulators encourage them to invest in packs [and] the larger peers provide helpful leadership and support in the asset class when they are seen investing in it.”

The largest of these peers is Korea’s National Pension Service (NPS), the third largest public pension in the world with around USD 800bn in AUM.

Private equity holdings represent around 37.5 percent of its total alternatives portfolio and recent private equity fund manager appointments include Beijing-based Hillhouse Capital and Macquarie Asset Management Korea.

Its PE AUM has nearly doubled over the past five years and it wants to raise allocations to alternatives from around 11% to 15% by 2025.

To do this, just over a year ago it formed a partnership worth a reported USD1.2trn with the largest pension fund in the Netherlands to invest in large-scale infrastructure assets. Later, in 2021, it announced tie ups with BC Partners and Stafford Capital Partners.

More strategic partnerships are planned with the fund targeting investments in hydrogen and electric vehicle battery.

Sovereign wealth fund Korea Investment Corporation (KIC) – which surpassed USD200bn AUM last year and invests entirely outside the country – shares a similar outlook. It wants to increase its alternative allocation from around 15% to 25% by 2027 and last year opened a San Francisco office to cement a commitment to US tech startups.

In January KIC’s Chief Executive Jin Seoungho said it will increase private equity and venture investment in the tech sector such as artificial intelligence, software and information securities, as well as healthcare and telecommunications infrastructure.

But during 2021 more than 10 employees left its alternative investment division, adding to a steady flow of exits since 2017 which include former private equity team head Jay Huh.

Making efforts to understand the challenges and goals facing these Asian giants may only be for the brave in 2022. “ Asia is very, very difficult this year because beyond any other market, it’s heavily relationship driven “