Morgan Stanley’s Au-Yeung: Asian family offices still favour alternatives

Family offices continue to make a “concerted effort” to incorporate alternatives, particularly private equity and hedge funds, into their investment portfolios. This is according to Christina Au-Yeung, head of investment management services, Morgan Stanley Private Wealth Management Asia. “We are still in the relatively early innings of Asian families building institutionalized frameworks whereby alternatives makes up a meaningful part of that portfolio,” she said at the Bloomberg Family Office Summit in Hong Kong. “We’ve moved from the pursuit of outright outperformance and concentrated bets to building portfolios with very clear objectives as to what each bucket is designed to achieve from a risk-adjusted return perspective, and that is going to help to build that alternatives allocation.” However, there have been times when Asian investors have been over allocated to alternatives, partly due to how much more flexible regional investors are in deploying capital. “Our global peers function within a much more rigid framework of asset allocation, whether it’s due to governance or tax restrictions,” Au-Yeung (pictured) said. “In Asia, Asian families are able to retain a degree of flexibility even when you’ve built out your very clear and concise asset allocation portfolio.” “And the beauty of this is that Asian families are able to be both under and over allocated to alternatives at times, and are able to deploy both more institutionalized as well as entrepreneurial capital.” “Whereas our peers globally have been compounding alternatives exposure over time, some of that dedicated decision-making has been sitting there for a long time, compounding over the generations and not moving in and out so much.” So while family offices in North America and Europe may already have in place longer term exposure deployment towards alternatives, Au-Yeung said family offices in Asia are still building that allocation. “But certainly I’ve seen times where we are over allocated in alternatives in the region, and we’ll continue to see pockets of that to come,” she said. Fears surrounding private credit Although alternatives are still in favour, there has been growing anxiety surrounding private credit after a number of write-downs of funds run by blue chip alternatives firms such as Blackstone and KKR. But despite recent events, Au-Yeung expects that access to underlying private markets will continue to remain in the perpetual structures such as evergreen or semiliquid vehicles, albeit in a more targeted way. “What I think that we will start to see is some thought around the design as it relates to investor targeting and as it relates to liquidity offers,” she said. “That is similar to what we’ve seen the hedge fund community go through, during the financial crisis, in terms of thinking about how they offer periodic liquidity.” After the 2008 global financial crisis caused suspensions and fire-sales for many hedge funds, firms shifted from quarterly style redemption terms to more strategy-specific approaches, matching fund liquidity to that of underlying assets. “There is a nuance to be taken to this asset class,” Au-Yeung said, referring to alternatives more broadly. “There are certainly areas of the market that are more suitable for locked-up vehicles, and there are certainly areas of the asset class that continue to be well placed in an evergreen structure.” Two of the biggest private credit firms, Apollo Global Management and Ares Management, gated requests for redemptions this week as more investors seek to liquidate their private credit exposure. The two firms decided to limit withdrawals to protect existing investors, given the illiquid nature of the underlying assets. These events underscore the importance of family offices carefully considering the mismatch between the vehicle and underlying assets, according to Au-Yeung. “That doesn’t necessarily mean that just because the underlying market is private, or that the underlying asset is not expecting to IPO very soon, that it’s not appropriate for an evergreen structure,” she said. “It could well be appropriate if the overlaying redemption terms are laid clearly to the end investor and well communicated throughout, and that everyone’s interests are aligned in that regard.” “Gates are ultimately there to protect the existing investors and function as they should and we believe that as long as you understand those terms, then you are in a good place.”