Institutional investors in Asia-Pacific have increased their allocations to private markets to an average of 11.5% of their portfolio in 2024 from 10.3% in the previous year, a new report finds.

Globally, almost three-quarters ( 73% ) of institutional investors expect investments in private markets to outperform public markets over the next five years, according to the seventh Private Markets Study published by Aviva Investors, the global asset management business of London-based insurer Aviva plc.

The annual research, conducted in September and October 2024, captures responses from 500 institutional investors, including corporate pension plans, public and government pensions, insurers and financial institutions in Europe, North America and Asia, which represent combined assets of US$4.3 trillion.

While “diversification” was highlighted by most respondents ( 70% ) as their main reason for allocating to private markets today, the ability of these assets to provide an illiquidity premium is expected to become an increasingly important characteristic. The study shows that 47% of investors expressed this as being a key reason for allocating to private markets assets in the next two years versus 40% today.

“The illiquidity premium is emerging as a driving force behind the trend towards private markets, and investors are recognizing it as a reason to increase their allocations to these strategies,” says David Hedalen, head of private markets research at Aviva Investors.

“Investors have had to adapt to changing market conditions over the last 12 months. Despite this, allocations to private markets have continued to trend upwards. It suggests a recognition of these asset classes to deliver across various stages of the investment cycle and offer diversification from public markets.”

Search for suitable opportunities

Allocations to private corporate debt are marginally lower in APAC ( 9% ), compared with a global average of 10% and 12% in North America ( 12% ). “This is a result of the maturity of the markets more broadly, with the overall size of the Asia-Pacific private credit market being much smaller than the US,” says Nick Fisher, research director for private markets at Aviva Investors.

Compared to other regions, investors in APAC are most likely to increase their allocations outside their home market ( 64%, against a global average of 57% ), particularly in Japan, Singapore and South Korea.

Meanwhile, 45% of APAC investors identify difficulty finding suitable opportunities as one of the biggest barriers to invest in or increase allocation to real assets, against 38% globally.

While investing directly remains the most popular way to invest in private markets, more institutions in Asia-Pacific like co-investing or club deals than in other regions. About 40% of the surveyed APAC respondents selected co-investing/club deals as the preferred way of investing in private markets in 2024, up from 32% in the previous year.

Also, 65% of APAC investors expect private equity to deliver the strongest risk-adjusted returns over the next five years, the highest among all regions and higher than the global average of 58%.

However, given current difficulties in China’s real estate sector, few Chinese investors expect high risk-adjusted returns across real-estate equity ( 35% ) and debt ( 10% ), compared with the global average of 25%, over five years. They are not alone in the region. Only 40% of investors in Hong Kong expect real estate equity to deliver the strongest risk-adjusted returns over the period, and 16% of those in Japan expect real estate debt to do the same.

Sustainability trends

In 2024, 64% of APAC investors considered sustainability as one of several key factors in the assessment of real asset investments, up from 49% in 2023, reflecting its growing importance.

In terms of demand for sustainable real asset approaches, decarbonizing existing real estate assets is particularly popular, showcasing the region's focus on retrofitting properties to meet sustainability standards.

Investors are increasingly aware of the challenges associated with sustainable real assets. In APAC, the difficulty of finding suitable opportunities is the dominant concern ( 60% ), suggesting that investors are actively pursuing sustainable assets but encountering barriers in execution.

Globally, the incorporation of sustainability continues to grow, with three-quarters of investors worldwide now considering it as either a critical factor or one of several factors in investment decisions, up from two-thirds in 2023. Net zero also continued to be a focus for global institutional investors, with the study showing an increase in the proportion of respondents from across all regions having some form of commitment in place to reach net-zero emissions.

Looking ahead, 76% of investors identified ‘technological advances’ as being the top structural theme they expect to create the most significant opportunities in private markets over the next decade. This was followed by “demographic shifts” ( 69% ) and the “transition to a lower-carbon and nature-positive world” ( 63% ). 

Hedalen comments: “There are a number of structural megatrends taking force across the private markets universe – from life sciences, to the energy transition and shifting demographics. It will be critical for investors to understand these trends and refine their ability to determine performance and long-term value at an individual asset level.

“This might explain why investors are increasingly interested in ‘multi-asset pooled funds’, ‘single-asset pooled funds’ and ‘co-investment’ as routes-to-market. All three offer efficient access to a manager’s expertise alongside experience in asset selection rather than investing directly. Our findings show these entry points have increased in popularity over the last 12 months, rising by 5%, 3% and 8% respectively.”