Growth of Asian pensions a boon for private equity

As more Asian pension funds grow in size more capital will make its way into private equity as the region’s largest investors turn to alternatives in search for higher yields.

A study by Willis Towers Watson found 31 Asia Pacific sovereign and public sector funds managed an aggregate $3.7 trillion in 2016, representing a growth rate of 7 percent compared with the previous year. These APAC funds also outpaced the average 6.1 percent of the world’s largest pension funds overall.

While funds in the region have largely invested in fixed income, several have been prompted in recent years to allocate more to alternatives in order to boost returns.

One example is China’s National Social Security Fund (NSSF) which experienced the highest annualised growth rate of 20.6 percent in US dollar terms in 2016, the study revealed.

The $349 billion NSSF generated a 15.1 percent investment return in 2015 according to its latest annual report, higher than the 11.7 percent posted in 2014. This was the fund’s best performance in six years mainly driven by its allocation to alternatives, according to the National Council for Social Security Fund which administers the NSSF. As of April 2016 nearly a quarter of the fund was allocated to alternatives according to PEI data, with fund commitments in recent years made to CITIC Capital, Fosun Capital Group, Legend Capital and SAIF Partners.

Meanwhile Singapore sovereign wealth fund GIC Private Limited, which invests an undisclosed portion of the proceeds of the $227 billion Central Provident Fund invested in Special Singapore Government Securities, said it expects to increase its exposure to private equity and real estate to as much as 15 percent of its $100 billion-plus portfolio. GIC is also looking to do more direct and co-investments, a spokesperson told Private Equity International in July.

In addition, Korea’s $462 billion National Pension Service said in March that it plans to increase its holdings of foreign and alternative investments from 31.3 percent in 2017 to up to 40 percent by 2021, following the Ministry of Strategy and Finance’s asset allocation plans.

Jayne Bok, head of investment for Asia at Willis Towers Watson, said: “A central characteristic of leader funds has been on their ability to innovate, rather than to rely on practices which may have worked in the past, whether that be through more streamlined asset allocation, uses of factor strategies and other smart betas and better methods of accessing private markets.”

Overall assets under management of the world’s largest pension funds reached $15.7 trillion in 2016, up from $14.8 trillion in the previous year, according to the study.

On average 41.7 percent of the top 20 funds’ assets were invested in equities, 37.2 percent in fixed income, and 21.1 percent in alternatives and cash.

The Government Pension Investment Fund of Japan remained at the top of the ranking, where it has been since 2002, with assets under management totalling more than $1.2 trillion in 2016. The fund is 39 percent larger than the second fund in the ranking, the Government Pension Fund of Norway at $893 billion.

South Korea’s NPS comes in second among the largest APAC pension funds with assets totalling $462 billion as of end 2016. Next in line are China’s NSSF ($349 billion), Singapore’s CPF ($227 billion), Japan’s Pension Fund Association for Local Government Officials ($183 billion), and the Employees Provident Fund of Malaysia ($165 billion).