Investors in Asia are increasing allocations to private equity as performance in other alternative asset classes fails to meet expectations. Chinese investors play a growing role in funding Asia-domiciled funds.

Data by Preqin shows 47% of Asian institutional investors have more appetite for private equity as an asset class – the highest proportion among all regions. Only 6% of them plan to reduce their allocations to private equity. 

Experts witness the same trend among high net worth individuals. “More HNWIs are investing into PE funds in Asia, partly because of underperformance in hedge funds. Over a longer horizon, PE funds can produce the return that people want, though they need to give up some liquidity,” says Alexander Traub, managing director of Asia at Augentius, a specialist fund administration provider for private equity funds.

Hedge funds in Asia reported year-on-year returns of -5.88% as of end May, data from Evestment shows.

At US$422 billion in assets under management, Asia’s PE industry is now nearly three-fourths the size of Europe’s PE industry. However, fund managers appear to have difficulty putting committed funds to good use. As of end of 2015, US$123 billion of dry powder remained uninvested – a situation that has not improved since then, says Traub.

“There is a record level of dry powder in GPs due to a lack of investment to be made. Further, for the past 12 months, because there is uncertainty globally and in China, they [PE funds] have had to put a lot of cash on the sidelines,” he adds.

Traub also notices that Chinese investors are more important sources for PE funds in Asia. “The region’s private equity industry is heavily dependent on Chinese money – even non-Chinese funds will typically rely on Chinese cornerstone investors. In recent years we have seen more and more Chinese corporates and state-owned enterprises invest in offshore funds that allow deployment of capital into Europe and the US,” says Traub.

China in itself is Asia’s largest market for PE funds, accounting for US$85 billion of total AUM in Asia (as of April 2015), according to the Asset Management Association of China (AMAC).