Despite growing market challenges, Asia Pacific investors remain optimistic about increasing exposure to private markets in the coming years, according to a State Street Survey.

Private markets have been playing an increasingly important role in investor portfolios in recent times as a form of diversification. And they may continue to do so, despite market challenges such as the high interest rate environment. 

According to State Street’s third annual survey on private markets allocations, 47 percent of respondents in APAC are investing more than 30 percent of their portfolios in the market with 60 percent believing the allocation will reach 30 percent in three years. In comparison, 59 percent of respondents globally have allocated 30 percent or more towards private markets.

Top Asset Class

Within private markets, private debt was the most appealing to APAC investors with 78 percent planning to increase allocation to the asset class in the short-term.

«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 explore fresh market niches,» said Eric Chng, global head of hedge commercialization as well as head of alternative solutions for APAC and Middle East at State Street.

Market Challenges

While interest in private markets remains high, there are still headwinds. The top three challenges cited by APAC respondents are justifying risk investments in a high interest rate environment (48 percent), lack of quality deals (33 percent) and increasing competition for deals (33 percent) in the primary markets. 

65 percent said that elevated borrowing costs will continue to negatively affect the attractiveness of leveraged private market investments. Only 64 percent and 63 percent said they will increase allocations to private equity and infrastructure, respectively, over the next 1 to 2 years, compared to 67 percent and 71 percent globally. 

Inflation Outlook

In terms of the economy, 42 percent of APAC respondents believed that inflation in their region has peaked, including just 10 percent in China. This compares to 68 percent in North America and 80 percent in Europe. Just 44 percent in APAC believe local inflation will come back within their domestic central banks’ target levels within the next two years. 

The survey was based on responses from 480 institutional investors including multi-asset managers, private markets managers, pension funds and insurance companies worldwide. 120 of the respondents are based in APAC.