Private assets are set to play an important role in helping Asian HNWIs meet their long-term investment needs.

When it comes to knowing what to do with their wealth, Asian high-net-worth individuals (HNWIs) have clear goals. According to a recent Lombard Odier report, more than three-quarters consider it imperative to maintain or improve their current lifestyle.

While this highlights a laser-like focus on their aspirations, what is less positive is the number of Asian HNWIs who believe they have achieved these targets: the same report suggests that only one-fifth have accomplished their wealth goals through their investments.

The root cause of this dilemma is striking. Around 80% of Asian HNWIs haven’t fully structured their wealth to meet their desired goals, the study finds. Moreover, confidence in public markets is notably low: more than 60% of HNWIs feel there is too much speculation in listed companies, while two-thirds believe there is a disconnect between the financial markets and the real economy.

How can HNWIs move closer to accomplishing their desired wealth outcomes over the long term?

Discover more about Asia HNWIs' goals here.

Private assets: the investment case

Private assets are a strong contender to meet this need. Once an investment class exclusively accessed by large institutional investors, today it presents a vast array of wealth growth opportunities for HNWIs.

With private assets under management amounting to about USD 9.1 trillion as of September 2023¹, the principal portfolio benefit is enhanced returns². Private equity has historically outperformed other asset classes by a significant margin³.

A further advantage is diversification. Private assets have low correlation to publicly listed stocks and bonds, and therefore tend to enhance the performance of portfolios. As the underlying assets of private companies are not traded on public markets, there is also limited exposure to volatility caused by market movements, with asset valuations typically reflecting company fundamentals.

A third benefit is access to the real economy. The vast majority of companies with revenues over USD 250 million are private, amounting to 86% of the market, with publicly listed entities representing only 14%, data from S&P Capital IQ finds⁴. Their impact is felt far beyond revenues, too: privately held companies create an estimated 87% of US GDP, and employ three-quarters of the workforce⁵.

Greater understanding of private assets is needed

Investing in private assets isn’t without challenges. Principal among these is familiarity with the asset class and an understanding of its sub-categories. The Lombard Odier study found that while over 58% of HNWIs are interested in investing in private assets, only around 19% have integrated them into their portfolios.

Critically, the study also suggests that only a quarter of HNWIs understand how private assets can help them achieve their investment goals. Greater knowledge and understanding are therefore required.

The private assets universe consists of private equity, private debt and real assets. Private equity is capital allocated to private companies, where the goal is to sell the entity and make a profit via capital appreciation: private equity funds are raised to fund start-ups, growing companies and acquire mature companies, as well as to inject capital into distressed entities. Exposure to non-listed companies can be purchased through direct investments, private equity funds or via a private equity fund of funds.

Private debt includes debt held by or extended to privately held companies; this sub-category mostly involves non-bank institutions lending to private entities, providing these lenders with regular income. Such loans are typically short term and at floating rates, where the yields are a few percentage points above market rate.

Real estate and infrastructure provide two sources of returns: income in the form of rent, and the potential for capital appreciation. Real estate investments are usually divided by their underlying asset across residential, commercial and industrial properties, with infrastructure investments typically covering energy and water; transport and logistics; social facilities like hospitals; and telecommunications networks. Portfolios should include a broad diversified approach in terms of managers, geographies, industries, sub-categories and strategies, among others.

Read our insights on how private markets can provide a pathway to sustainable investing here.

A long-term investment that requires due diligence

Not being publicly listed, the majority of private investments are deemed to be largely illiquid. Most HNWIs therefore invest in private assets for a minimum of 10 years. Key to identifying the most appropriate assets is to ascertain the goals and objectives investors wish to achieve from each investment, including identifying expectations regarding returns, the portfolio’s risk profile and the investor’s liquidity requirements. Often, investors new to private assets favour funds comprising of well-known names and industries, but do not conduct a thorough review of how these assets will perform and the risks they present.

Such investors also tend to underestimate the role of a fund’s manager. Unlike public equities, there are no benchmarks in the private assets space, which makes assessing the performance of each fund and fund manager problematic.

To counter this information shortfall, wealth managers can assist HNWIs by conducting due diligence on the fund and its manager in areas like fund performance, industry knowledge and experience, the firm’s governance, and the culture of its people.

A more positive year for private markets

Despite a mixed last couple of years across private markets – challenging economic conditions and a slow market presented headwinds in 2023, which led to an approximately 33% fall in aggregate deal value compared to 2022 – there is room for optimism⁶. Indeed, with ongoing volatility in listed markets for both equities and bonds, the advantages of an allocation to unlisted assets can be appealing to HNWIs.

Notably, some sectors stand to gain significantly. Digitalisation and the green economy are creating opportunities across private equity, private debt and real assets. Increased digitalisation is requiring more hardware, software and network equipment like telecoms towers from a wide range of companies both large and small, while the global push to create greener economies is seeing rising demand for low-carbon technologies ranging from solar panels to electric vehicle batteries, and much more. The region’s rising middle class should also see greater need for soft infrastructure, including health services and education: both should present openings across the different sub-categories as well.

With moderate interest rates looking likely to remain in place over the coming year, private debt increases the current yield of private asset portfolios, another noteworthy benefit. And in real estate, while higher rates may challenge some assets, the sub-category will act as a natural inflation hedge as, in general, property generates income from rents that are tied to inflation.

Ultimately, to capitalise on what the year ahead has to offer, HNWIs must work with their wealth manager to unearth these opportunities, and, critically, to help them accomplish their desired wealth outcomes while building for the long term.

¹ Preqin Global Report 2023: Alternative Assets
² Harris, Robert S. and Jenkinson, Tim and Kaplan, Steven Neil, Private Equity Performance: What Do We Know? (July 2013). Journal of Finance, Forthcoming, Fama-Miller Working Paper, Chicago Booth Research Paper No. 11-44, Darden Business School Working Paper No. 1932316
³ Bloomberg, Cambridge Associates Benchmark (Returns report, Vintage 2009-2019), all Private Equity strategies, all geographies, Net Pooled IRR as of 31 December 2021)
⁴ Capital IQ, August 2023. Represents the share of private and public companies in the United States, Europe and Asia with Last Twelve Months (“LTM”) revenues greater than USD 250 million
⁵ United States Department of Labor statistics
⁶ Preqin News, Private equity in 2024, 20 December 2023