The search for quality assets that generate stable returns has led ABL Life to take investing into renewable assets in infrastructure and real estate up a notch as it gears up for greenfield projects.
“We are considering jumping into some greenfield renewables too, and we actually did,” Jiroo Eoh, the insurer’s head of infrastructure and real asset investments, told AsianInvestor in an exclusive interview. The plan to add more renewables forms part of its strategy to expand real asset investments in its $20 billion portfolio into public-private partnerships (PPP) investments.
Renewable assets typically included wind plants and solar farms.
Eoh is confident in the ability of renewable assets to produce stable yields for the South Korean insurance company, which is a subsidiary of China’s state-run Anbang Insurance Group. In addition to a largely fixed price that comes with a predictable cash flow, Eoh said renewable assets have only suffered a limited impact from the Covid-19 pandemic, which has cemented his positive outlook towards them.
The lifer is still internally discussing how much it will raise its allocation to PPP assets by, he added. It currently has around 20% of its portfolio allocated to real assets, the bulk of which is in domestic infrastructure debt investments. Eoh declined to state how much the insurer already has invested into PPP-linked assets.
Amid a “lower-for-longer” interest rate environment, asset owners are increasingly making similar allocation plans similar to those of Eoh. Some of the notable examples include New Zealand Superannuation Fund and Korea’s Public Officials Benefit Association, who are looking to increase their exposure to real assets – typically seen as property and infrastructure – in a bid to cushion their portfolios from the pandemic’s impact. Indeed, JP Morgan Asset Management has suggested “real assets are the new bonds.”
LOCATION, LOCATION, LOCATION
ABL Life is looking well beyond the Asia region as it seeks these renewable assets.
“European countries are doing well in PPP, especially the UK... We wanted to do some in the US, but the US is not really familiar with PPP types,” said Eoh. “Canada can be a good example to do PPP, so these are the regions we focus and are looking into to do further exposure in both infrastructures and renewables.”
Eoh also highlighted Australia as a country into which ABL Life may seek out renewable investments, given the country’s proven track record in establishing PPP investments with reasonable returns. The country has been accelerating its renewables regime. A new report published on August 19, commissioned by the Australian Conservation Foundation, found that renewable projects will provide a third of Queensland’s electricity by 2025.
However, renewable energy prices have hit record lows this year. That is encouraging in terms of their overall growth, because it means renewable energy is increasingly competitive when compared to oil or gas fired plants, but it offers potential challenges for would-be investors. Still, Eoh said he has faith in these assets.
“In one way or another there will be some adjustment because the construction cost will go down too. Either way it will be adjusted and then we will get to a new norm of consistent returns,” he said.
Ultimately, ABL Life’s goal of investing is primarily asset liability management, he said, so it should be sufficient to generate returns without taking excessive risk. The lifer has a general annual investment return target of around 4% to 6% for debt investments and 10% to 12% for equity investments respectively; meanwhile the risk charges for these asset classes respectively stand at 6% and 12%.
Eoh declined to state the exact breakdown of ABL Life's investment portfolio.
DEEPLY DISCOUNTED ASSETS?
While Covid-19 has sent shockwaves through the market, dragging down asset prices, Eoh said ABL Life is not particularly keen on snapping up discounted assets that are proving to have very volatile valuations.
“I'd rather not buy assets that have discounted valuation right now; I'd rather pay more and buy assets that have limited movements in their valuations after Covid-19,” he said.
“Like this pandemic issue, you never know when the second wave will come. When you thought that your valuation was appropriate, what if it has another step-down and what are you going to say then?” Eoh added.
He has not, however, completely ruled out the possibility of buying assets that are deeply discounted (such as distressed, non-performing loans), but he noted that such investments would not be the main part of the portfolio.
“Sometimes we had to do some risky investments because the spreads or margins are so low in some investments but that doesn't mean we want to take extra risks and do some silly investments,” Eoh said.