Asia-Pacific set for surge in private markets AUM

Private markets assets under management in the Asia-Pacific region should grow at an annualized double-digit pace over the next five years, even if the nearer-term outlook remains uncertain, according to Preqin, the London-based alternatives research house.

That mix of confidence and caution runs through Preqin's June 14 report, "Alternatives in Asia-Pacific 2022."

The overriding outlook is one of optimism.

Preqin CEO Christoph Knaack, in a foreword to the 55-page report, predicted the Asia-Pacific region's "private capital AUM, excluding China RMB funds, will grow at an annual rate of 15% through 2026, reaching $2.2 trillion."

"The industry goes from strength to strength, and we foresee a bright future," he said.

Still, an increasingly uncertain outlook this year — marked by spiking inflationary pressures, increasingly aggressive U.S. rate hikes and heightened geopolitical tensions — leaves room for less spectacular outcomes in the near term.

"Our predictions are contingent on the macro environment remaining relatively benign," noted RJ Joshua and Cameron Joyce, vice president, research insights and senior vice president, deputy head of research insights, respectively, at Preqin's London headquarters, in the report.

"The prospect of inflation and rising rates present formidable obstacles to the continued growth of alternatives AUM," the two wrote.

At the end of the day, "it depends on how things play out," Mr. Joyce said in an interview.

"The deterioration of the macro picture hasn't necessarily been factored in" to Preqin's estimates so there's additional downside risk but it's a five-year forecast and a lot will depend on "how long this macro environment persists," Mr. Joyce said.

Preqin's data scientists are in the midst of updating the firm's models to pave the way for more granular forecasts, moving beyond AUM and fundraising to "map out the whole industry" at the level of deals and exits, Mr. Joyce said.

Meanwhile, Preqin's "The Future of Alternatives 2026" report on the global private markets outlook, due out Oct. 5, will more fully incorporate this year's evolving macroeconomic and macro-policy developments into the firm's forecasts, he said.

With the same headwinds prevailing now around the globe, the Asia-Pacific region should have some relative strengths as well as weaknesses, the Preqin report said.

One advantage: inflationary pressures remain modest for most countries in the region, compared with the U.S.

On the negative side, the retreat by equity markets globally this year should prove to be a headwind for a region that relies on initial public offerings for a relatively high proportion of its private equity exits.

There's a heavier dependence in the region on IPOs, priced off public market multiples, noted Mr. Joyce in the interview. With multiples dropping this year, general partners facing challenges in achieving exits at valuations as currently marked could slow down their exit activity, he said.

"When you look at the deal side as well, I think we're going to see managers looking for more structured deals (and) more downside protection when they do deals," he said.

Still, Preqin predicts private equity, including venture capital, will remain the focus of Asia-Pacific private markets activity, with 83% of the region's allocations by 2026, up from 73.6% at the end of 2021.

Over that same five-year span, Preqin predicts the share of total Asia-Pacific private markets allocations held by real estate funds will drop to 8.5% from 14.1%, with private debt funds falling to 4.4% from 6.3%, and infrastructure funds sagging to 3.8% from 5.5%.

Other data points in Preqin's report included:

• $482 billion in private capital dry powder as of March 2022, up from $446 billion in April 2021.
• $224 billion in Asia-Pacific-focused private capital raised in 2021, up from $133 billion in 2020.
• 2,764 active private capital investors located in the region, down from 2,892 in 2020.
• 156 hedge funds launched in Asia-Pacific in 2021, up from 117 in 2020.

Mr. Joyce said in the interview that because Asia-Pacific private capital markets are comparatively nascent — accounting at the end of 2021 for 12.6% of global AUM of $8.9 trillion — relatively strong growth from that low base could be expected, but instead Preqin is forecasting growth in line with the global market.

If Asia-Pacific private markets AUM achieves Preqin's target of $2.25 trillion by the end of 2026, the region would only see its share of an anticipated global private markets total of $17.77 trillion edge up marginally to 12.7%.

"We expect APAC's private capital AUM, excluding RMB-denominated funds, to increase at a healthy CAGR (compound annual growth rate) of 11% between 2022 and 2026," second only to North America's projected annualized growth of 12% over the same period, wrote Messrs. Joshua and Joyce. Preqin predicts Europe's growth over that period to come in at 10%.

Messrs. Joshua and Joyce warned if an inflationary environment persists, "growth in alternatives may be subdued," with institutional investors potentially choosing to reallocate to inflation-hedging assets and interest-bearing securities.

Still, they conclude, "over the long term, alternatives are likely to remain attractive to institutional investors as a key component of their investment portfolios."