Unlocking Asia-Pacific’s wealth potential

The APAC region has witnessed a rapid surge in private wealth over recent years. According to projections from Knight Frank (www.knightfrank.com), the number of Ultra High Net Worth Individuals (UHNWIs) in the region is set to grow by 38.3% between 2023 and 2028, positioning it as the fastest-growing region globally.

To take advantage of attractive returns, High Net Worth Individuals (HNWIs) across the globe are seeking to diversify their portfolios, with APAC’s HNWIs being no exception. Consequently, wealth managers in the region are turning their attention to private markets.

In this insight, we explore this trend, examine the key challenges that wealth managers in the APAC region may face as they try to keep up with demand, and discuss how Euroclear is addressing these issues through market-neutral, industry-wide infrastructure supporting access to private market funds for a broad range of investor types.

The APAC region is experiencing substantial growth in private wealth Assets under Management (AuM) during what Capco (www.capco.com) terms the greatest wealth management transfer in history. Wealth in the region is changing hands to a younger generation who have a longer investment horizon and are therefore slightly less concerned with liquidity, being able to lock up capital investments for extended periods, sometimes up to ten years.

With more wealth at their disposal, APAC’s new HNWI generation is keen to capitalise on the robust returns offered by private markets and the protective benefits of portfolio diversification. Historically, alternative investments have yielded stronger returns during market slowdowns. This explains the rising demand for private market access among private wealth investors and distributors in the region as interest rates continue to decline, with Japan being a notable example of this trend. 

Japan stands out in the APAC region for its large HNWI population; the Capgemini World Wealth Report 2022 (www.capgemi.com) highlighted Japan as the second largest market by HNWI population in 2021, with 2.6 million HNWIs, second only to the United States. Statista (www.statista.com) data projects that AuM in Japan’s wealth management market will reach $6.5 trillion by 2028, up from $6.2 trillion in 2022.

Key factors driving this interest

• Low interest rates encouraging investments in equities over traditional stocks and bonds.
• Depreciation of the Yen making foreign investments more attractive.
• Market potential with Japan being identified by global asset management firms such as Blackstone as boasting significant opportunity according to Private Equity International’s Japan report (www.privateequityinternational.com).

However, despite growing interest, private markets remain somewhat inaccessible in the region, limiting service capabilities for wealth managers, and preventing fund managers from fully tapping into a growing pool of capital.

There are several key challenges for distributors and HNWIs investing in private markets in the APAC region. These can be categorised into three main areas: lack of education, liquidity issues, and inaccessibility.

As the new generation of APAC HNWIs diversifies into alternative investments, education and transparency become critical. For these investors, selecting the right managers and strategies is paramount for achieving desirable returns; in the APAC region, the annual return disparity between top-quartile and bottom-quartile private equity managers can exceed 20% annually (Professional Wealth Management - www.pwmnet.com).

Additionally, the new generation demands the same level of transparency from private market funds that they can access from publicly traded funds. However, private market funds typically share reporting manually and off-system, leading to outdated information that hinders informed investment decision-making. As a result, there is a pressing need for a digital platform for private market funds that offers investors easily accessible and frequently updated fund reporting.

While the younger generation of HNWIs in the APAC region is more willing to lock up their money for longer periods, there is still a preference for liquidity. In emergencies, individual investors may need to access their funds during the lock-up stage.

Consequently, there is growing demand for semi-liquid funds, which can offer a compromise between liquidity and higher returns. APAC investors therefore often opt for semi-liquid funds as a supplement to traditional fixed income investments (Professional Wealth Management - www.pwmnet.com).

However, many investors lack education on how semi-liquid funds really work, assuming that they will be able to withdraw investments whenever the need arises. When a private fund manager experiences huge client withdrawals during a fund’s lifecycle, they might need to limit redemptions in a process called ‘gating’. It is crucial that HNWIs understand the constraints on their funds during the investment lifecycle and that managers have a platform on which they can provide this kind of transparency.

Many APAC wealth managers are still using outdated operating systems reliant on manual processes. This creates inefficiencies that drive up costs and limit the number of clients they can effectively serve, therefore diminishing client satisfaction.

Currently, the market is tailored towards institutional investors who can meet high investment minimums, and fund distribution relies heavily on bilateral relationships, which are impractical for a larger volume of individual investors.

Moreover, the new generation of HNWIs is tech-savvy, mobile-oriented, and seeks innovative processes and solutions. Evidently, a technology-based solution is required – one that provides individual investors and distributors with access to private markets in the same way they have traditionally been able to access public markets. This requirement necessitates the development of a comprehensive digital platform and technological infrastructure to support the more complex nature of private markets.

To solve these challenges, resilient, market-neutral technological infrastructure is required that facilitates access to private market funds on a global scale for all investor types.

Euroclear is providing this infrastructure through its FundsPlace offering, which provides a single point of access to tap into a full, end-to-end solution for all fund types, from ETFs and mutual funds to private market funds.

This infrastructure provides three key benefits for all actors in the value chain.

• Digitisation: By offering a fully digitised investment journey for private market funds, from investor onboarding to capital calls and reporting, Euroclear is increasing efficiency for wealth managers and private markets accessibility for HNWIs.
• Connectivity: By connecting the 2,000+ distributors already in its network with Fund Management Companies (FMCs) on a global scale, Euroclear is allowing distributors to provide their clients with access to a broader range of private funds, therefore maximising portfolio diversification.
• Scalability: Digitisation and connectivity both drive scalability by increasing operational efficiency and driving faster relationship-building between distributors and FMCs. As a result, distributors can scale their operations at a much faster rate by taking on more clients and boosting overall client satisfaction.

By leveraging cutting-edge technology, Euroclear is enabling APAC’s wealth managers and investors to navigate the complexities of private markets with greater efficiency. By offering a fund data room and enhanced, real-time reporting as part of its digitised investment journey, Euroclear is providing investors with improved education and transparency, enabling better-informed decision making.

As a result, APAC’s growing pool of investors are supported in meeting their investment objectives and fund managers can capitalise on the region’s vast potential.