Despite the negative impact of high inflation, investors in Asia-Pacific still plan to increase their allocations to private market assets, a new survey finds.

Currently, 47% of APAC respondents are investing more than 30% of their portfolios in private markets. More respondents (60%) believe their private assets allocations will reach the 30% level in three years' time, according to the third annual private markets survey by State Street Corporation.

“Private assets already are and will become even more important in institutional investors' portfolios,” says Eric Chng, global head of hedge commercialization and head of alternative solutions for Asia-Pacific and the Middle East at State Street. “The great rotation from public to private assets within portfolio allocations is expected to continue in the coming years."

The study, commissioned by State Street and conducted by CoreData Research, surveyed 480 respondents from traditional asset managers, private market managers, insurance companies and asset owners across North America, Latin America, Europe, and Asia-Pacific. About 120 are from Asia-Pacific.

Infrastructure and private debt remain the top private market asset classes, with 71% of respondents worldwide expecting to increase allocations to each over the next one to two years.

Varying inflation views

Within the APAC region, views about inflation vary. Majority of the respondents in Japan, Singapore and mainland China don’t believe inflation has peaked – in particular, only 10% of respondents in China believe it has – while at least half of investors in Hong Kong, Australia and South Korea believe it has peaked.

Fewer than half (42%) of APAC respondents think inflation has peaked in the region, compared with more than two-thirds (68%) in North America and nearly three quarters (70%) in Europe.

A smaller number of APAC respondents (44%) believe inflation would come back within their domestic central bank's target level within the next two years, compared with 50% in North America and 47% in Europe. 

The survey also reveals that the high-yield environment is weighing heavily on justifying risky private markets investments for respondents across regions.

Around two-thirds (65%) of APAC respondents agree that elevated borrowing cost is a key challenge and will continue to negatively affect the attractiveness of leveraged private market investments, while only 53% in Europe and 56% in North America believe so. 

"Despite the macro headwinds, APAC institutional investors still plan to increase their allocation to private markets," says Chng.

Still, APAC investors are less optimistic about private equity and infrastructure than their counterparts in North America and Europe. About 64% in APAC said they would increase their allocation to private equity, and 63% to infrastructure, over the next two years, compared with 67% and 71% respectively globally. 

"Within private markets, private debt is the most appealing to Asia-Pacific investors with 78% planning to increase allocation to the asset class in the short term," Chng says.

"We have seen high levels of dry powder and a marked slowdown in deal flows, indicating valuations gaps between buyers and sellers persist. In an attempt to seek alpha in a crowded marketplace, investors have increasingly explored fresh market niches."

Top challenges

For APAC investors, the top three challenges are the high interest rate environment (48%), a lack of quality deals (33%), and increasing competition for deals (33%) in the primary markets.

“In an ever more complex and crowded investment landscape, enhancing risk management processes was one of the top three strategic focuses for investors in APAC," Chng says.

Data is a key focus for risk management with 60% of respondents in the region saying they struggle with the accuracy of their valuations, while 56% said frequency and timeliness are a major problem.

“It is clear from these results that APAC institutions see an opportunity to harness data for better decision-making and capital deployment. Creating a scalable and resilient operating model through outsourcing will give them a clear and distinct advantage to create better investment outcomes," Chng stresses.