Customizing LP portfolios: Insights for success in Asia's dynamic market

In a rapidly evolving investment landscape, LPs face a growing variety of asset classes and challenges when building resilient portfolios. Ahead of SuperReturn Asia, Kerrine Koh, Managing Director and Head of Southeast Asia at Hamilton Lane, explores key considerations for LPs in today’s environment. Koh discusses how Asia’s newer allocators have more flexibility to customize their private market portfolios, the macroeconomic hurdles investors face, and how private markets can compensate for public market headwinds. With practical advice on managing overallocations and building robust portfolios, this Q&A provides essential insights for investors looking to succeed in the region.

What do LPs need to consider when customising their portfolios in today’s environment? How does Asia stand out in this regard?

In today’s environment, LPs are offered a larger variety of private asset classes and a much deeper pool of managers to select from. There are more options now to achieve an income or distributions objective, where investors could construct a portfolio that has a greater mix of private credit, infrastructure and secondaries, versus relying just on private equity, which has a longer duration.

In Asia, there are more allocators who are newer to private markets, having been deploying to private markets for less than five years. This means that investors have more flexibility when it comes to customising their portfolios, and to some extent, have the benefit of a “blank slate” to make sure they are setting strong foundations for their private markets portfolios without being bogged down by legacy allocations.

At the same time, investors in Asia have traditionally had more home bias, which meant that their portfolios were more likely to have more VC or growth exposure, given the nature of the Asian PE/VC landscape. Investors in the region now have an opportunity to build up more global exposure, which can be more buyout oriented, complementing their current portfolios.

What are some of the biggest challenges LPs are currently facing?

Macro uncertainty and liquidity have been the biggest challenges for LPs. The world is still adapting to a much higher cost of capital after more than a decade of cheap financing. In terms of private markets, this has meant an adjustment of the opportunity set, with credit becoming more attractive in almost every private asset class.

This does not mean that private equity is going away. Private equity has definitely seen higher interest rates than current, although deal makers have also been recalibrating the mix of debt and equity in their transactions. In this environment, GPs are looking to hold on to companies for longer and are more comfortable sticking with assets that they are familiar with.

At the same time, IPO markets have remained muted, and as a result investors have seen slowing DPI. This has meant that the secondaries market has never been more active, as both LPs and GPs seek liquidity solutions. That being said, we have seen a pick-up in M&A volumes, especially in the middle market, where larger companies are still looking for opportunities for strategic acquisitions.

With public markets facing headwinds, how do you think private markets fill in the gap and compensate for it?

From a strategic allocation perspective, private markets have consistently outperformed over the past 15 years, across private equity, private credit and private infrastructure. For investors with a mid to long term investment horizon, it makes sense to complement their public markets portfolios with private markets allocations.

Investors should explore all forms of diversification opportunities available to them. Given bond markets have not protected drawdowns in stock markets in recent market episodes, the search for further diversification has never been greater. Private markets offer a different source of alpha and less correlated returns in many regards. As such, we expect to continue to see more investors allocating to private markets or increasing their current allocations, in order to build a more robust investment portfolio.

There’s a lot of talk about overallocation causing a denominator effect: How can LPs manage this?

We have not observed that overallocation has been as prevalent as what is commonly believed. Public markets inherently exhibit more price volatility and the world has just gone through a recalibration to higher rates. From a governance perspective, LPs and boards should widen their tolerance bands between public and private market allocations, so as not to become a “forced seller” in markets where valuations are more challenged.

At the same time, compared to 20 years ago, allocators have a lot more tools at their disposal to create more flexibility in their portfolios. The advent of evergreen private market funds allows investors to be more flexible in dialling up or down their private market allocations at the margins. In addition, secondaries markets have evolved to better support the private markets ecosystem by allowing investors access to liquidity if needed.

Lastly: What would you say are the keys to successful portfolio construction?

The key building blocks to portfolio construction are returns, risk and liquidity. Portfolios which cater to each investor’s unique requirements in these areas are more likely to be resilient and robust over the longer term.

Investors should be open to using all asset classes and investment tools available to them, including newer fund structures that improve upon existing ones.

At the same time, having access to high quality private markets data and technology enables investors to make informed choices, without depending on over-simplified rules of thumb. Last, but not least, investors need to be patient, committed and disciplined in their approach to private markets, given the longer-term nature of the asset class.