Alternative Investment Opportunities Through a Slowing Economy

G2 – The riseof Asia As discussed in Wealth Outlook2023:Mid-Year Edition, our investors have overweightedUSD investments through the past decade as theUS Dollar has been the dominant global currency. But as qualified investors re-evaluate the geographic diversificationof theirportfolios, they shouldalso examine their long-term exposures to alternatives assets. Rather than lookingat potential short-term currency factors, less liquidassets such as private equity, real estate and hedge funds shouldbe viewed through a lens of long-term factors and local market dynamics that may drive returns. For example, the continued shift in economic power towardAsia has beenan unstoppable trend for several years. We continue to focusonpotential investment opportunities indevelopedAsia and greater China for both returns and diversification, while also being consistent withother thematic trends. Chinese A-shares were in a steep selloff from June 2021 to October2022, drawing down37%. The selloffwas due to a combinationof global market conditions, including rising rates, inflation, and the possibilityof recessionweighedon stocksas well as China-specific concerns includingCOVID lockdowns, a contractinghousingmarket, and an uncertain regulatory environment. The equitymarkets have reversed some of those losses due to the government introducingnewpolicymeasures around reopening fromCOVID Zero and improved real estate, financingand tech investment plans. Despite thismodest recovery, as we are seeing in the West, Chinese equitiesare trading at forward earnings multiplesnear five-year lows, providing a potentiallyattractive entry point for investment. TheChina A-share market is also inefficient due to low institutional ownershipandhigh trading volumesdominated by local retail investors, allowing specialist activemanagers to profit from stock picking. Within this context, we have also seen thematuration of the Asia private equitysectorwith significant fundraising and capital deployment activity over the past few years. However, the pace of investments in Asia far outstrips exitsas compared to the US. From 2011 through 1H 2022, the median investment-to-exit ratios (amount invested/exit proceeds) of China and India are approximately8.2x and 5.9x, respectively, whereas that of theUS is approximately 2.0x. As of 1H 2022, the un-exitedprincipal in the Asia Pacific regionhas reached $1.2 trillion. 16 This createsan even greater need for investor liquidity inAsia and has created a meaningful overhang of un-exitedprincipal. Yet, the secondary private equity market in the region is much less mature than in theUS and Europe.WhileAsia historicallyhas represented nearly 20% of global private equity fundraising and deployment over the past few years, it has only represented about 7%of the global secondary market. Therefore, specialists inGP-led secondaries inAsia may be well positioned to capitalize on thisenvironment. 16 APER, 2011 to 1H 2022 OPPORTUNITIES | WEALTH OUTLOOK 2023 | MID-YEAR EDITION │ ALTERNATIVE INVESTMENTS | 25