India, Japan, South Korea gain as alternative investors move out of China

India is gaining and China is losing, wondering why? It is because of investments.    

As per latest reports, China has been losing the interest of investors who were pumping money in private equity, real estate and venture capital investment. Alternative investors are now broadening diversification of their assets into India, Japan and South Korea.

According to data released on Wednesday by Preqin, a London-based alternative investment research company, investors are seeing demand for more renewable energy plants, 5G connectivity and data centres in countries including India.

The data further said that of a total of $14.8 billion for private equity investment in the Asia-Pacific region in the April-June quarter, $5 billion was earmarked for Japan, while $6.9 billion was set aside for diversified investment across the region.

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As per the data, fundraising for infrastructure investment has also been increasing.

But let’s first quickly understand what are alternative investments?

An alternative investment is a financial asset that is not stocks, bonds, or cash. These type of investments are typically less liquid, meaning they can’t be easily sold or converted into cash. They are also sometimes referred to as alternative assets and are considered riskier. However, they have often generated higher returns than publicly traded assets, attracting the attention of large institutional investors.

And why is China not attracting investments?

As per the report, alternative investment in the Asia-Pacific region remained tepid in the April to June, majorly due to economic slowdown in China, geopolitical tensions between Washington and Beijing and tight credit conditions due to high interest rates.

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In the April-June quarter this year, fundraising for alternative investments hit a decade low of $22 billion, only about a fifth of the recent peak of $98 billion reached in the fourth quarter of 2020, the report said.

Angela Lai, head of APAC and valuation at Preqin, cited the prolonged slump as one of the key reasons for the absence of a growth engine comparable to China before 2021. “With investor sentiment toward the country (China) souring, investor money is heading to other locations, including the US,” she said.

“Within the alternative investment space, venture capital and real estate, the areas among the most severely affected by China’s slowdown, are also the least popular among alternative investors. Outside of Japan, real estate is probably one of the weakest asset classes within alternatives," Lai said.

But overall, Lai believes the diversification beyond China is positive.  

“The rest of the region has a lot of different things to offer. You still have India, you have Japan, you have Korea. That’s why we still have fundraising into regional funds,” she said.

“But the gap left by China is really big. That’s why we expect it to take awhile to go back to the previous levels overall,” she said.

Investors are now cautious

Investors are now cautious as against pre-2021 when they were chasing deals and driving up investment valuations.

Lai went on to say that a full-fledged recovery of fundraising might have to wait until next year, but warned even after that, the recovery will likely be gradual. “The overall atmosphere is still very cautious,” she added.

Lai also informed that in the private equity category, deal activity is running at about half the pace of 2021.  

Talking about Japan, the government’s Pension Investment Fund has set aside 5 per cent of its portfolio for alternative investment. At present, they make up just 1.5 per cent of the total.

“It is not like fund managers are running out of money to do deals. There is ample equity to do that, but it is still slow because everyone is being very cautious in terms of where they want to deploy capital. People are definitely taking longer to do due diligence and go through the whole process to find the right price and opportunities than before,” Lai further said.

With inputs from agencies