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Investors have increasingly turned to private markets and hedge funds for their potential to generate uncorrelated and enhanced returns, even though these assets often offer less liquidity and require longer investment horizons.
In this era of expanding options in alternative assets, how can investors navigate product choice while staying diversified and keeping a good handle on risk? This session brings together seasoned professionals from top private market investors to delve into what they observe on the ground in the private markets and hedge fund scene in Asia.
Moderator:
Hugh Chung, Chief Investment Advisory Officer, Endowus
Panelist:
- Henry Chui, Head of APAC Private Wealth, Partners Group
- Edwin Chan, Head of Asia and Head of Client Solutions APAC, iCapital
- William Vettorato, Managing Director, EQT
- Tracy Lau, Managing Director, Carlyle
Globally, family offices have about 44% exposure to private equity, private real estate and infrastructure, hedge funds, and private credit, according to a family office study by Goldman Sachs last year.
Edwin Chan, Head of Asia and Head of Client Solutions APAC at iCapital, said that at the institutional level, there has been a persistent interest in private markets. Despite having excellent opportunities in the market, Chan observes that interest among individual investors in Asia is only at a nascent level.
This matches our experience of working with family offices in Asia and tells us that the allocation weight for family offices in the region is significantly lower than the level and perhaps almost negligible among individual investors. Because private markets are still new asset classes, Chan believes more time is needed for distributing and advisory platforms to educate the market.
The good news is that the industry is changing, thanks to high-quality private markets and hedge fund strategies available through evergreen funds, thereby democratising access to individual investors and family offices.
Diversification in private equity, with evergreen structures
In the extension of his One Takeaway Challenge, Henry Chui, Head of APAC Private Wealth at Partners Group elaborated on the evergreen structures for private equity investments. With evergreen structures, there is no J-curve effect as capital is fully invested from the start. They also offer regular liquidity windows and diversification across regions and sectors.
Riding on that, Chui gives 5 factors for a successful evergreen vehicle:
- A robust investment platform capable of both direct and secondary investments
- The implementation of a pro-rata allocation policy, instead of allocating the best deals into the closed-end funds before into other structures. This approach ensures equal access to investments for sovereign wealth funds and individual investors alike.
- Liquidity management. Striking a balance between keeping the portfolio invested to avoid underperformance against benchmarks and having inherent liquidity.
- Keeping valuation current is critical for every month and quarter.
- Vintage diversification in a portfolio of companies in different stages in the value creation cycle generates a natural flow of distribution and liquidity for new investments.
Echoing Chui’s points, William Vettorato, Managing Director at EQT, investing in healthcare and life sciences and technology, weighed in on the diversification discussion.
Achieving diversification across multiple investment strategies, Vettorato also cautions against over-diversification, noting the inefficiency of managing portfolios with excessive numbers of companies. While a typical portfolio of EQT owns around 200-300 companies, Vettorato emphasises EQT’s lead role as a direct investor in the value-creation process of these holdings.
Continuing on the value creation part, he described it as an idiosyncratic element that differs from one company to another. It is also an element that makes private equity investments favoured by investors.
He also added that monthly marks or valuation of underlying private equity assets should be done in a fashion that market beta is not introduced to a portfolio that might differ from the benchmark index or comparable gauges.
Diversification in private credit
Over to the private credit space, Tracy Lau, Managing Direct at Carlyle, was posed a question about the sustainability of a high level of yield from private credit markets, given the anticipated interest rate cut on the horizon, and credit quality.
Building a portfolio across this expansive private credit market helps maintain consistent yields and navigate a myriad of factors, including an expected decline in interest rates and a crowded direct lending space.
Private credit is traditionally–or arguably, narrowly–defined by senior debts and sponsor-backed floating-rate instruments, and these are highly dependent on merger and acquisition activities.
She suggested that the scale of the entire market is larger than what people normally think it is. Considering high-quality bank debt, like student loans, trade finance, and infrastructure projects for energy transition and the development of artificial intelligence, she proposed that the private credit market is closer to US$46 trillion in value, above the general estimate of US$1.7 trillion.
Liquidity in an evergreen vehicle
The ease of investing and the enhanced access to investment opportunities are widely acknowledged. Yet, it's important to note that the assets underlying these investments are illiquid, meaning that evergreen funds are not designed for frequent trading like stocks and bonds.
"This is the reason we refer to them not as semi-liquid, but as open-ended funds," explains Chan from iCapital. He acknowledges that the open-ended structure of these funds makes them more acceptable to investors, offering them the flexibility to enter the market on a monthly or quarterly basis with options for redemption.
"The critical question is how investors should allocate their portfolios, especially when faced with an expanding array of opportunities in the private markets compared to public markets," Chan elaborates.
He points out that many companies now remain private for longer before considering public listings, a phase during which significant value can be created. According to Chan, the advent of newer private market solutions is designed to provide investors with access to these stages.
Tracy Lau of Carlyle, highlighted that the perception of liquidity varies depending on portfolio construction.
From her discussions with numerous institutional investors, particularly those managing pensions and insurance funds, she observed a tendency towards maintaining excessive liquidity.
Lau remarked that while liquidity offers a degree of comfort to investors, it comes at a cost. In her experience with family offices, she noticed a tendency to preserve unnecessary levels of liquidity, sometimes for future generations that have yet to come into existence.
Lau advocates for a strategic approach to investment, urging individuals, family offices, and institutional investors to first consider the objectives their portfolios aim to achieve.
The inaugural Endowus Investment Summit, held on 17 April at Asia Society Hong Kong Center, hosted 400+ clients, investors, and industry professionals. Enjoying the digest? Watch the full recap video of the discussion:
Start your private debt investing journey with Endowus Private Wealth
Endowus’s private wealth arm aims to provide access to a wider suite of investment products, including private debt, private equity, and hedge funds. With Endowus Private Wealth, clients looking to invest a minimum of US$1 million in assets across our services can gain exclusive access to more personalised solutions and products.
Endowus keeps fund-level fees as low as possible by working with fund managers to access their lower-fee share classes and with our industry-first practice of rebating 100% Cashback on trailer fees to our clients.
Contact our private wealth arm at familyoffice.hk@endowus.com. We can cater to your needs — be it through bespoke portfolio construction to cater to various goals and life priorities or being able to exclusively access more investment products, many of which are only available to Professional Investors.
A simple verification is all you need to access world-class private markets and hedge fund strategies on Endowus.
Read more:
- Are “evergreen” funds really the future of private market investing?
- Private Markets & Hedge Funds Symposium
- How much am I meant to allocate to private credit, private equity, and hedge funds?
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