“If you look at what has happened in the macroeconomic landscape, rates have gone from low to absurdly low during the COVID-19 crisis, while interest rates are going to be on hold for some time,” Prashant Bhayani told Asian Private Banker.
“With income or yield becoming even tougher to generate in public markets, investors will increasingly look for yield in private asset markets,” the CIO APAC for BNP Paribas Wealth Management added.
As a result, the appetite of Asian HNWIs and ultra-HNWIs for private assets — already quite noticeable over the past few years — has become markedly more pronounced since the start of the COVID-19 pandemic.
Capital markets have seen a quick rebound following a massive correction in late March. Yet, the recovery has been largely driven by those big cap names, he said.
“There’s a correlation between the private and public market. But when we look at companies in private markets, they are not necessarily S&P 500 or Hang Seng Index- type sized companies,” he explained.
“These companies are probably more than mid cap or the lower end of large cap. In general, small and mid cap companies have not bounced back as much as those big names,” he pointed out, indicating that valuations are more attractive for buying companies in private markets.
Strong appetite for real estate and PE
Among all the alternative investments, real estate and private equity are the most popular asset classes among entrepreneurs.
According to the bank’s latest entrepreneur report, 75% of entrepreneurs held private equity investments and among these active investors, private equity comprised on average 14% of their total financial portfolio.
For real estate, a significant of 73% of those surveyed are active investors in private real estate. Of them, almost a third (31%) held private real estate investments overseas — with China, the US and France the most popular markets.
“[The strong appetite for real estate and private equity comes from] a combination of client preference and past returns,” Bhayani said.
“A lot of entrepreneurs in Asia have made their wealth in property and they feel quite comfortable with the asset class. At the same time, interest rates have been going down over time and financing costs have been low, and properties as an asset class have performed very well.”
There’s a similar story for private equity, he said, adding that the returns for private equity have been “superior” over the past few years. In addition, Asian clients have in general a higher return target, and the familiarity with private equity is growing in Asia, with buyout funds becoming a mainstream sub-asset class.
High conviction call in alts
Bhayani said that both private equity and real estate will remain a core part of the bank’s asset allocation strategy. In addition, the bank is proactively exploring opportunities within the infrastructure segment.
“Infrastructure funds are an area we are increasingly warming up to,” he said. “They generate modest returns but they are more defensive, as they are backed by long-term cash flows and physical assets as well as an income distribution ability.”
Furthermore, the bank favours warehouse and logistics within real estate, which have benefited from COVID because of e-commerce and outsourcing.
“There will be opportunities in the hospitality sector too, as we look into the next two years, as this segment looks very attractive and it offers a significant discount,” Bhayani concluded.
In a recent interview, Royston Low, regional head of private investments at BNP Paribas Wealth Management APAC said the impact of COVID-19 has provided ample attractive vintage opportunities for private equity.
“The data clearly show that vintages that start in the year of, or the year after, a crisis tend to do much better than those that start in a more ‘regular’ environment,” Low told Asian Private Banker.
“Private equity firms,” he argued, “are in a better position to take a buy-and-build approach to consolidate a sector by using dry powder to make add-on acquisitions, at a time when purchase price multiples are low, to alleviate a company’s financing concerns and to help renegotiate loan terms and debt obligations if necessary.”