Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
… as PGIM looks at real assets in China
Prospects for private markets, including real estate and venture capital, are as bright, or brighter, than they are for the public markets in China, according to a PGIM investor event.
The US$1.5 trillion global manager, the investment management arm of the Prudential insurance group of the US, held its annual China Investment Symposium, virtually, on May 28. Keshav Rajagopalan, of the PGIM institutional relationship group, moderated a session on ‘Evaluating and Gaining Access to China’s Private Markets’.
According to a straw poll of attendees, most of the investor focus in alternatives in China is in real estate, which is slightly head of private equity and venture capital combined. About a third of the attendee organisations invested in more than one of the three asset classes.
In another poll of the audience, 62 per cent said they would increase “moderately” their allocation to China, on which Rajagopalan commented: “So it sounds like it’s not a whole fully fledged effort to increase your private market allocation substantially. But a good sense of the room is, we need to increase and think about, again, how to allocate to China. Which is the exact point of this conversation.”
One of the most experienced China investors in the US fiduciary space, the US$11billion Robert Wood Johnson Foundation, has seen a steadily increasing flow of investment capital into Chinese private markets since it started investing there in 2005.
The New York-based Brian O’Neill, the foundation’s CIO, said: “In 2005, when we started to invest in China, we assumed that we would do what we did in other geographies and have some money in private equity funds and some money in public equities. But we quickly found It was very difficult to identify a good ‘A-Shares’ manager.
And in fact, I’d say we started a decade of rather unsuccessfully trying to find a good ‘A-Shares’ manager. “But on the private side, we very quickly encountered some managers that we thought looked like the type of folks we’d like to invest with. And their funds were being pointed directly at what we thought was the most attractive part of investing in China – the emerging consumer – and a little bit later technological innovation, and a little bit after that healthcare.
“So, from the beginning, we started to put more money into privates than we had thought we might. And over the 15-year period, the private portfolio has grown to the point where, in 2015 we exited ‘A-Shares’ just to manage the overall exposure. So, from our point of view, private equity, particularly early-stage venture type investing in China has been the best place to be.”
His charity is the largest philanthropic foundation in the US based solely on health, with the aim of “improving the health of all Americans”. It is based in Princeton, New Jersey.
StepStone Group, a US-based global private markets manager with 19 offices around the world, including Sydney and Perth, started investing in China in about 1999, at the end of the dot-com bubble.
Beijing-based Weichou Su, a partner, said there were not a lot of players in the market then. The market was now more mature and represented the second-largest market for both PE and venture after
the US.
“It’s a really mature ecosystem from angel investors to early stage, mid stage, late stage and all the way to private equity, growth capital, and buyouts,” he said. Stepstone completed an IPO on the Nasdaq exchange in September 2020. It had US$80.5 billion in assets under management as of March 2020.
For PGIM, which has US$1.5 trillion under management (as of December 2020), demand for real estate opportunities in China has tracked a similar path as that for other private markets. The manager’s US$253 billion in alternatives includes not only private assets but also hedge funds and other more liquid assets.
Singapore-based Cuong Nguyen, head of APAC investment research PGIM Real Estate, said that the scale of the Chinese market had been a key driver of investor behaviour over the past 10-15 years.
He believes that, compared with other developed markets in the region, such as Singapore, Japan and Australia, China is very much on an equal footing.
“But what we see on the research side is not only that but also the size of the market has increased tremendously for the last 10 years or so, because of the continued to trend build higher quality properties.”
There had also been more standardisation of market practices, from the leasing to investment processes. Foreign capital now accounted for about 30 per cent of all transaction volumes in Chinese real estate. This was very similar to what you see in Japan or Australia. China was becoming more and more “investable” in the eyes of foreign institutions, Cuong Nguyen said.
