Asia's private capital industry to hit US$6.1t by 2025, but structural challenges remain: Preqin
ASIA'S private capital industry is on track to reach US$6.1 trillion by 2025, but amid the momentum, take-off remains elusive as institutional investors are still limited by structural challenges unique to the region.
Among them are business owners' reluctance to cede control and less attractive financing options, alternative assets data provider Preqin said in an inaugural report tracking the region's alternative investment market.
As at September 2020, Asia-Pacific-focused private capital industry assets under management (AUM) totalled a record US$1.71 trillion. Add the US$156 billion held by the region's hedge funds as at Q4 2020 to the mix, and the alternatives industry is well on its way to hitting the US$2 trillion milestone in aggregate assets.
As at April this year, private capital (excluding hedge funds) dry powder in the region was sitting at a record US$446 billion ready to be deployed, with 77 per cent held by private equity and venture capital fund managers.
"While the story thus far has been largely dominated by China, Asia's emerging markets - from South-east Asia to South Asia - are the catalysts for many growth trends, and investors are taking notice," said Preqin's chief executive officer Mark O'Hare in a foreword to the report.
Asean, projected to become the fourth-largest economy in the world by 2050 - trailing China, India and the US - offers promise to the private capital industry, especially with its "up-and-coming technology industry and attractive startup environment", the report noted.
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By 2030, Asia could contribute 60 per cent to global growth and see an additional 1.5 billion people enter the middle class, outpacing both the Americas and Europe, according to figures from the Asian Development Bank and World Economic Forum.
The ranks of the middle classes are swelling fast in the region, as are the institutions managing their savings and surplus capital. Global advisory firm Towers Watson reported 7 per cent annualised growth of regional AUM for the last five years, outpacing the less than 5 per cent for the top 300 funds worldwide. Meanwhile, there are already as many high net worth individuals in the region as there are in North America, making it a rich market for alternative assets, according to the report.
Preqin expects private capital AUM targeting Asia to grow at a compound annual growth rate of 28.3 per cent, to reach US$6.1 trillion in 2025.
"Yet, despite these compelling characteristics, take-off remains elusive. Potential deal flow has often been curbed by business owners' reluctance to cede control, leaving managers to seek out smaller minority positions in growth and venture-backed companies instead," the report said.
The availability and cost of financing has also remained less attractive, relative to North American and European markets. And exit liquidity is scarce - as with most nascent markets - dissuading some investors from deploying capital into funds in the first place.
For now, there may be "more sizzle than steak" in the market, but this has not dampened investor hunger. "But the way the alternatives story unfolds in future is unlikely to follow the same pattern as Western markets," Preqin noted.
Some segments of the Asia-Pacific's alternatives market are making faster progress than others, it said. Venture capitalists, for instance, are finding it easier than buyout promoters, with Preqin noting that full-ownership deals that "lit the fire" of Europe's and North America's private equity industries have been "harder to ignite" here.
The going is even tougher for hedge funds, with new fund launches in the region tumbling by over 20 per cent last year to 117. Still, Asia-Pacific hedge fund AUM finished 2020 up 20 per cent.
Real estate funds in the region told a similar story, with new launches sharply down but AUM up as a result of strong performance and increased fundraising.
With uncertainties ahead, including how the Covid-19 pandemic and its aftermath will play out, Preqin suggests that the region is headed for "steady rather than startling growth" over the medium term.
Zooming into Asean, Preqin's data shows AUM for the region's private equity and venture capital industry standing at a record US$33 billion as at September 2020, almost doubling in five years.
While the pandemic has dampened fundraising activity in 2020, 2021 is "shaping up to be a watershed moment for the venture capital industry", with the region's most valuable unicorns exploring concrete plans to go public.
Preqin cited, for instance, the "merger of equals" between Indonesian tech giants Tokopedia and Gojek to form GoTo, in the run up to a dual listing in New York and Jakarta later this year.
Singapore-headquartered Grab is also expected to conclude a merger with US blank-cheque company Altimeter Growth Corp by year-end.
Singapore, in particular, was highlighted as a "gateway to the region's future", with its variable capital companies legislation referred to as a "legal innovation". The regime, launched in January 2020, offers certain tax exemptions and flexibility in how funds distribute capital.
"Longer-term hopes are likely being placed on Singapore climbing up the ranks as a top destination for the domiciliation of notable mega funds deploying capital globally - a trend that will take time to gain traction," said the report.
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