Principal GI in talks to buy Asia private real estate firm

Principal Global Investors (PGI) plans to expand in Asia by investing in offshore fund distribution and increasing its representation in China, among other initiatives.

The asset management arm of Principal Financial Group also sees opportunities in equity and debt in Asian private real estate, and is holding talks with specialist businesses that it could potentially acquire.

Its CEO said that the firm is closely watching developments in China, including mutual recognition, and continued liberalisation in the country could lead to an application for a WFOE office.

Jim McCaughan, chief executive of PGI, discussed his plans for the firm and priorities in the region with AsianInvestor last week when he was in Hong Kong to participate in the FundForum Asia.

"I don't think we will be in a lot more countries. We are already in 70 countries worldwide and in all the significant markets in Asia. Our aim is to fill that out and do more business," said McCaughan.

The firm continues to look at new capabilities to add and one obvious gap is in private real estate, both equity and debt, which is entirely in the US at present.  PGI operates a multi-boutique model and presently has a stable of 17 boutique firms that serve institutional and sub-advisory segments.

“US real estate has been a good investment.  We will continue to look for potential acquisitions for capabilities in private real estate in Asia and Europe and this is something we have been looking at for a while. Conversations are going on,“ he said.

Other than this, the firm could also add niche capabilities such as infrastructure, agriculture and forestry investment specialists.

“Those are possibilities but they are relatively small niches that won’t change the face of our business but could be an attractive addition in the cart,” McCaughan said.

“We have got the full range of capabilities. I may add other income-based capabilities in different bond markets. The ageing population means there will be a lot of continued, sustained demand for income-based capability.”

The firm is also aiming to participate in the exchange-traded funds business by launching actively-managed ETFs.

“The ETF market in the US started 20 years ago,” noted McCaughan. “The impetus for growth was taxation. It is more tax-efficient than mutual funds and is compatible with the fee-based wrapper programme, neither of which is applicable here hence the reason why it didn’t develop early on in Asia. One good thing about ETF is that it offers the ability to trade at shorter term."

The firm does not have an ETF business because it hasn't been a player in the passive space. However, it recently applied to the New York Stock Exchange to create active ETFs. "We are working on that. As ETF opportunities widen, we expect to be involved," said McCaughan. He declined to provide more details about the active ETF until it is launched.

Like most international firms, PGI is keeping an eye on opportunities in China. Apart from waiting for the Hong Kong–China mutual recognition scheme to kick-off, it is considering increasing its representation in China where it presently has a representative office in Beijing. An application for a wholly foreign-owned enterprise (WFOE) licence is being considered as Chinese asset owners and partners are increasingly looking to asset managers to have boots on the ground for more support.

McCaughan said the catalysts for opening a WFOE office would be mutual recognition and the China enterprise annuity business – the domestic pension scheme which sees employers and employees making contributions. “If we find a partner and get traction in our enterprise annuity [business], these are the catalysts for increasing our presence there,” he said.

“What we do in China will depend on how fast it opens up. If mutual recognition gains traction, that would be good. The signs are there that China will open up and RMB will become convertible eventually. We are as much involved as any international firm in China, which we see long term will be a great opportunity but we can’t force it faster than the regulator allows.”

In the more immediate term, the firm aims to invest further in its offshore fund distribution. Where it tended to offer its offshore funds on the institutional business side, it now wants to expand its funds wholesale business in Asia in the next 12 months.

McCaughan said it has a strong offshore funds range and Ucits products are still the preferred way for buying international investments in Asia. To support this move, it is adding sales resources and the people it will hire will be part of the firm’s alliance management group, a team that works with banks on a global scale.

“We work with global banks in 20-30 markets. The alliance management group manages the relationships with global banks worldwide. It has been successful in the US, has started nicely in Europe and we will roll this out in Asia. This will bring our overall relationship on the table,” said McCaughan.

The firm is also still looking for an Asia chief executive as current CEO Kirk West assumed this role on a temporary basis earlier this year, as reported.

PGI is in the key markets in Asia either on its own or through joint ventures. Its JVs are with China Construction Bank in China and CIMB in Southeast Asia, the latter is a key player in retail business. It recently announced plans to participate in the Asean fund passporting scheme.

PGI managed $29 billion in assets from Asia, up 37% year on year, in 2014, which represented 8.9% of the total global AUM of $327 billion, as reported.

Its parent Principal Financial Group's business comprises retirement services, insurance solutions and asset management.