Institutional allocators target Asian private equity through hybrid models and secondaries

Key Points

Institutions allocating to Asia are moving from seeking purely high-growth beta to utilising the region for targeted geographical diversification in response to shifting market conditions.

According to Peter Lui, principal at LGT Capital Partners, allocator behaviour has become far more discerning following the "Goldilocks years" of strong paper returns.

"Allocation decisions are no longer about broad thematic exposure; they require demonstrated team stability, rigorous underwriting discipline, and a proven track record of returning actual cash distributions (DPI) to investors," Hong Kong-based Lui told AsianInvestor.

Institutional investors are becoming more selective in how they deploy private capital across Asia as prolonged exit delays, uneven economic growth and pressure on fee structures reshape allocation decisions. Rather than pursuing broad regional exposure, allocators are increasingly targeting specific markets, favouring secondary opportunities that can accelerate distributions, and using co-investments to gain greater control over portfolio construction while reducing costs.

The pursuit of stronger cash returns is also reshaping how investors view Asia itself. Rather than treating the region as a single investment theme, allocators are increasingly differentiating between markets based on their maturity, exit opportunities and deal dynamics.

"Crucially, Asia cannot be treated as a single macro monolith," Lui said, noting that India remains a primary growth engine, Japan represents a mature buyout market centred around corporate carve-outs, Australia offers compelling SME buyouts, and China is predominantly focused on secondary market dislocations.

"Primary fund commitments offer broad diversification across dozens of underlying companies managed by localised teams with deep sector knowledge, making them an ideal starting point for overseas LPs seeking broad geographic access," Lui said.

Within this landscape, some investors maintain a strong structural bias towards small- and mid-cap funds. This segment targets founder-led businesses that benefit significantly from private equity support to institutionalise operations, expand margins, and execute add-on acquisitions, while offering multiple flexible exit avenues.

However, manager selection and market exposure represent only part of the equation. Allocators are also becoming more deliberate about the investment structures they use to enhance returns and improve capital efficiency.

ALLURE OF CO-INVESTMENTS AND SECONDARIES

Achieving real cash returns in the current environment has made secondaries a high-conviction theme. In Asia, this dynamic is amplified by significant supply-demand imbalance where the backlog of mature assets is immense, but the dedicated buyer pool remains relatively small, creating highly attractive entry points.

As investors balance their need for higher net returns against the operational demands of direct investing, many are settling on a middle-ground approach.

"Co-investments allow LPs to overweight exposure in specific, high-conviction assets," Lui said. "Because co-investments alongside underlying managers typically carry reduced or no management fees and performance carry, they lower overall cost structures for fee-sensitive clients."

A hybrid model is emerging among institutions.

"A notable trend is the continued growth of co-investments alongside trusted managers, which allow investors to increase exposure to attractive opportunities, improve fee efficiency and build direct investing capability," said Alex Seddon, head of impact and private equity, and Praveg Patil, head of Asia Pacific, impact and private equity at M&G Investments. However, most institutions do not move straight into direct investing, as "the limiting factor in direct investing is rarely capital. It is experience, infrastructure and access," they said.

COMPLEMENTARY CAPITAL

Yet the growth of co-investments has also highlighted the limits of internal investment teams. While many institutions want greater control over deal selection, relatively few are equipped to source, conduct diligence and manage transactions independently. As a result, investors are increasingly evaluating not only cost savings but also the strategic value of their investment partners.

"Institutional investors are increasingly evaluating syndicate structures based on total investment outcome," Seddon and Patil said. "The most sophisticated investors are not asking whether they can eliminate an intermediary; they are asking whether they can replicate the capabilities that intermediary provides."

This steep barrier to entry has transformed potential competitors into partners. Rather than competing for allocations in top-tier private companies, family offices and venture capital firms are increasingly playing complementary roles.

Family offices frequently participate as co-investors in transactions led by established managers to access attractive opportunities while benefiting from general partner (GP) underwriting capabilities.

"In our experience, the most successful companies are not choosing between family offices and private equity firms," Seddon and Patil said. "They are building cap tables that combine different sources of capital, expertise and networks to support long-term growth."