Big asset owners face growing challenges putting money to work in private markets buoyed by abundant liquidity. The answer, some argue, is to move beyond active management of those allocations to a proactive stance.
Kevin Bong, deputy director, economics and investment strategy with Singapore sovereign wealth fund GIC Pte. Ltd., said in a panel discussion at the Investment Management Association of Singapore's annual conference — held for the first time this year in partnership with Bloomberg — that entry multiples for private equity investments in the U.S. now are probably "a good 50% above the average of a much better vintage year."
Ten years into the rebound from the global financial crisis, there's a cyclical element behind those lofty valuations, Mr. Bong said. But a secular component — the sheer amount of institutional capital available for investment in private markets now — is "an interesting phenomenon in and of itself," he added.
Ample liquidity is allowing private companies, which in earlier times would have conducted an initial public offering to get the capital they required, to stay private longer. Investors that used to buy IPO shares to participate in a company's growth are finding now that much of that growth has been captured by private market investors — "a challenge in and of itself," Mr. Bong said.
GIC, which has long admitted to an investment portfolio of more than $100 billion even as external analysts peg its assets at closer to $350 billion, will get another big chunk of government money to manage this month.
The Monetary Authority of Singapore on Wednesday announced it would transfer S$45 billion ($33 billion) from Singapore's official foreign reserves — which amounted to S$404 billion at the end of April — to the government "for management by GIC" on a long-term basis.
Mr. Bong pegged GIC's private markets allocations at between a quarter and a third of the portfolio.
With sovereign bond yields stuck at low levels, big asset owners "are going in (to pricey alternatives sectors) with eyes wide open," said Jayne Bok, Willis Towers Watson's Hong Kong-based head of investments, Asia, speaking on the same panel. "You can see that valuations are an issue, but at the same time you don't really have any other alternatives," Ms. Bok said.
Quantitative easing has played a big part in creating that situation, potentially creating some perverse incentives along the way, said Leong Wai Leng, Singapore-based managing director, strategic partnerships, growth markets-Asia at the C$310 billion ($230 billion) Caisse de Depot et Placement du Quebec, Montreal.
When it comes to private markets investments, "a lot of us re-up," buying into subsequent rounds of fundraising by the same company, Ms. Leong said. "There's a bit of governance issue — you're almost incentivized" to pay a higher price for subsequent funding rounds because "you're already in the game and each time you re-up, on the book at least, you look much better," she said.
Now in public markets, "you're seeing quite a few high-profile IPOs in the U.S. that, the minute they list, basically go down," Ms. Leong noted, adding "it's not just the public portfolio managers that are struggling. We're also struggling trying to find the right valuation and the right story as well."
Illiquid alternatives account for roughly one-third of CDPQ's assets.
GIC's Mr. Bong noted that his organization has continued to take an increasingly active stance when it comes to its private markets allocations. "One of the key trends in our strategy that has evolved over time is to have gone from passive or semipassive investment funds to active — where we actively try to pick some of the best partners, and think about re-upping with those partners," and then on to direct investments, he said.
The next stage of that evolution is to go "from passive to active to proactive, where you no longer … sit there and think about deal flow and wait for that deal flow to come to you," Mr. Bong said.
Instead, "you actually think about the possible capital market solutions you can create. You can think about the networks you can tap, you think about originating your own deals as well, so you can capture just a little bit more return, just a little bit more premium," Mr. Bong said, adding "that's the evolution of our journey over time."
That move to a proactive stance is "very similar" to CDPQ's journey as well, Ms. Leong said.
In 2016, the Canadian pension fund pursued and won a C$6.3 billion mandate to design, build and operate a light-rail system for Montreal. More recently, the asset owner submitted a similar bid to design a light-rail system for Auckland, New Zealand.
Ms. Leong said because the capacity pension heavyweights and sovereign wealth funds like CDPQ and GIC have to make long-term investments in illiquid assets that opens the door for those actors to "work more together."
