BlackRock Inc., the world’s largest asset manager, said there is rising demand from Asia-Pacific investors for less liquid hedge-fund investments as European and U.S. financial institutions clean up their balance sheets.
More than half of the money BlackRock’s fund of hedge funds division drew from regional investors since January 2011 is dedicated to longer-term, special-situations investments, such as direct lending to companies that need cash and mortgage-backed securities, said Joseph Pacini, the Asia-Pacific head of Alternative Investment Strategy Group. Two-thirds of the allocation was made in the past year as macroeconomic concerns eased, he said.
“Asian investors today have a lot of cash and capital,” Pacini said in an interview in Hong Kong. “Over the last year, we have seen a noticeable shift from nervousness about investing to interest in where the markets are, what’s the dislocation and where we should be focusing now.”
U.S. and European financial institutions may have to shrink their balance sheets by another $3 trillion to comply with tighter regulation after the global financial and European debt crises, said Pacini. Asian investors who have survived the 1997-1998 Asian financial crisis and escaped the brunt of the latest global turmoil are eying opportunities, including in commercial real estate and aviation financing, to boost returns amid low interest rates, he said.
BlackRock’s alternative investment arm managed $110 billion in assets globally as of September in private equity, real estate, hedge funds and infrastructure. BlackRock Alternative Advisors, the fund-of-hedge-funds unit, oversaw $18.7 billion as of early October, with about half of that raised from Asia-Pacific clients, Pacini said.
Large European banks may shrink their balance sheets by as much as 2 trillion euros ($2.6 trillion), or 7 percent of their assets, by 2013, Pacini wrote in a paper last month citing government and International Monetary Fund data. That compares with the $250 billion of assets sold off or cut from balance sheets during the savings and loans crisis in the U.S. in the late 1980s, and the $350 billion during the Asian debt crisis of the 1990s, he said.
While trophy assets in some markets have been sold, further deleveraging is expected, Pacini said.
BlueMountain Capital Management LLC, an $11 billion New York-based manager, said it raised $1.5 billion, double its target, for a fund that invests in structured corporate credit, including asset-backed securities and less-often-traded corporate credit, tapping investor demand for higher returns amid near-zero interest rates and bond yields as governments around the world try to stimulate economic growth.
The Lyxor Distressed Securities Index returned 6.3 percent in the first 10 months, while the Lyxor Special Situations Index gained 3.3 percent. Both outperformed the 1.6 percent advance of the Lyxor Hedge Fund Index in the same period.
Asian institutions have indicated interest in investing in such assets through BlackRock funds, tailor-made accounts or alongside BlackRock funds, Pacini said. BlackRock has allocated several billions of dollars to managers, often small and specialized, that invest in such assets or through co-investments with them, he added, declining to give a more specific number as it’s confidential.
The fund manager is also looking to fill a void left by European banks such as Societe Generale SA and BNP Paribas SA that are winding back aviation financing even as aircraft deliveries increase, Pacini said. Aircraft deliveries this year may rise 23 percent to $95 billion from a year earlier, with aviation bank financing to slide 4 percentage points to 21 percent, London-based trade journal Flightglobal reported in January, citing a Boeing Co. forecast.
There is an estimated real estate funding gap of $86 billion in Europe and $31 billion in the Asia-Pacific region this year and next even after insurers and fund managers have stepped up to meet some of the refinancing needs, according to a report this month by property broker DTZ Holdings Plc.
“There’s refinancing that needs to happen because a lot of the commercial mortgage-backed securities and debt done in 2006, 2007 are coming due,” said Pacini.