With increasing client appetite for private markets, private banks are being very selective when adding to their product shelves to ensure they are working with top managers, leading fund selectors said at Asian Private Banker’s Funds Selection Nexus 2024 Hong Kong.

“We have to be very selective”

As the private market space gets bigger, banks are looking closely at the criteria for picking the right private funds and managers.

In selecting a manager, “What I lose sleep over the most is about the team,” said Michelle Shi, head of CIO global investment management alternative solutions for Asia Pacific at UBS Global Wealth Management.

Michelle Shi, UBS GWM

“There are different ways that we have to dig deep into the team and the composition, and sometimes it is about networking sessions with other limited partners (LPs),” Shi said.

“It’s to get to know what the past experience has been when other LPs have invested in the fund, how the GP has interacted with them as allocators.

“We have to be very selective of what we continue to add to our shelf to make sure that we are still working with the best-in-class managers that have been cycle-tested throughout time,” she said.

For private equity, Sabina Chiang, head of managed investments, wealth management, Hong Kong, at Standard Chartered, said the bank looks primarily at value creation. Also top of mind are historical loss rate, loan structure, lender protections, and leverage.

Additionally, Connie Sin, head of funds & alternatives, international wealth management, Nomura International (Hong Kong), shared, “We also look at how they source deals, what is the quality of the deals in the pipeline, [and] how much the upcoming investments will add value to the fund.”

She added that not only are private clients looking at private markets, but a lot of the big asset managers are also coming to the space. “They are all hungry for deals,” Sin said.

Rising private market interest

Fund selectors highlighted several reasons why interest in private markets is rising. “[Clients] have realised it is time to move away from cash and deposits […] a lot of them are willing to look for other alternative investment strategies,” shared Sin.

Meanwhile, the rise in family offices in Asia has also boosted interest in private markets. “Family offices are able to take on much more customised and complex transactions. We see there’s a surging demand in private single assets,” said Standard Chartered’s Chiang.

Sabina Chiang, Standard Chartered

Private credit, in particular, continued to see inflows in the first half of this year for the purposes of diversification and enhancing returns, according to fund selectors.

“The carry trade from being in private credit on a risk-return basis was unbeatable last year,” said UBS’s Shi. “With rates coming off, you will still get very healthy returns being top of the capital stack in senior and having a carry on it. I think that is something that will continue.”

“We see that private credit is still very much appealing […] The space will be even larger as we see a large amount of debt coming due for refinancing […] So, that opportunity set should be pretty interesting for private lenders,” added Chiang.

What else on the shelf?

Japan’s private market space also caught the attention of private banks this year. “We have it in our discretionary portfolio, but to be able to bring it to the advisory shelf was something which was extremely difficult because it was oversubscribed, but we managed to do it,” said UBS’s Shi.

“It shows that this is going to be quite an interesting vintage for Japan investments as we continue this path of activism in Japan, where there’s carve-out and a lot of non-core disposals coming through, and we’ll definitely see a lot more accretive investment opportunities there,” she said.

Connie Sin, Nomura International (Hong Kong)

Meanwhile, geopolitical uncertainty in 2024 also saw some banks eyeing hedge funds. “We believe that higher volatility or even more market dislocation, like in early August, make a very good opportunity for hedge funds to add alpha for our clients,” said Nomura’s Sin.

“We have been suggesting within the 20 to 25% of your alternative investments, half of that should be in hedge funds,” Sin said.

Mid-cap strategies

Another space banks are looking at is mid-cap strategies that can add value to clients who have already been investing in private markets but mostly large-cap. Sin shared that Nomura “has been sourcing middle market sales or even smaller size companies for them to really diversify.”

While mid-cap generally outperformed large-cap, Chiang at Standard Chartered noted these strategies typically stem from a very sophisticated group of clients.

“[The] majority of our clients still very much prefer the familiar, large-name kind of managers,” she said, “but to approach the mid-market, our bank does offer co-investment strategies, secondary funds, which may have a larger allocation to mid-market buyouts or specialised general partners.”

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