Axa Insurance's Singapore business is set to further increase its private market allocations despite concerns about high prices and the changing credit cycle.
“For the past couple of years we have increased our allocation to alternative assets, especially private assets and private debt,” Pierre-Emmanuel Brard, chief investment officer of Axa Singapore, told AsianInvestor.
“As we continue to ramp up our allocations to private assets, we are also mindful of issues such as high valuation – especially in private equity and private debt moving towards the end of the credit cycle – and liquidity management,” said Brard.
He is in charge of a $3 billion portfolio in total, with $1.2 billion of assets on the general insurance side and the rest managed for unit-linked products.
Brard did not elaborate on the details of the insurer’s portfolio in private assets or how much it will increase its exposure. But he told AsianInvestor that the insurer gets its exposure to private assets from both in-house and external fund managers.
Axa's move is in line with other global institutional investors, according to a survey in January this year by BlackRock, which polled 230 investors with some $7 trillion in investible assets. Around half of them (47% for private equity and 56% for private debt) said they intended to increase their private markets asset allocation this year.
Other market participants share Brard's concerns over the private equity market's valuations.
“Private asset valuations have stayed elevated and in some cases, even moved higher while stock markets were going through periods of decline,” Ankit Singhal, chief financial officer of Singapore-based single-family office AJ Capital, told AsianInvestor.
Another asset manager cited the case of leveraged buyout deals: “The average price multiples persist at above 10x Ebita [earnings before interest, taxes, depreciation and amortisation], a historically high level,” said Shawn Khazzam, Hong Kong-based head of the alternative solutions group at JP Morgan Asset Management.
Brard's concerns over the private debt asset class approaching the end of a credit cycle chimes with that of Paul Carrett, group chief investment officer of Hong Kong-based FWD, the insurance arm of Pacific Century Group. He said in January he was “a little bit surprised” that market players continued to inject capital into private credit.
USING DERIVATIVES IN SINGAPORE
In addition to the appetite for investing in private assets, Brard also highlighted the growing importance of using derivatives to hedge against risks, as local insurers move towards adopting the new solvency regime and accounting standards.
As insurers in Singapore come under closer scrutiny thanks to rules similar to the Solvency II regime in Europe, riskier asset classes such as private equity require higher capital charges. Brard said employing derivatives as a hedging tool can help de-risk a portfolio and complement asset liability management.
"The use of derivatives will allow insurers to better mitigate financial risks and to adopt more effective capital management," he added. "A suitable hedge on equity portfolio may also allow insurers to be exposed to a more efficient risk/return profile over the long run."
Derivatives can be incorporated into an insurer's portfolio using instruments such as cross-currency swaps, he said, but Singaporean players are lagging their European peers in their adoption of derivatives.
"Gaining a full understanding of the accounting and regulatory treatment of derivative usage can be a challenge in moving to a more sophisticated strategy and can sometimes be a lengthy process," he told AsianInvestor.
This story has been updated to clarify how Axa invests into private assets.