Beijing Taikang Investment is reviewing its private equity (PE) investment portfolio strategy to prioritise asset allocation and aims to be more rigorous when selecting PE managers, AsianInvestor’s 4th China Global Investment Forum heard in Beijing at the end of last month.

Taikang Investment, which manages the assets of Taikang Life Insurance, launched its PE arm in 2013, and initially invested through PE funds before making its first direct investment in 2014. The firm has now invested into over 30 PE managers, including onshore and offshore, venture capital and mezzanine funds, explained Sean Ma, executive general manager speaking on the panel at CGIF.

The fund manager initially adopted a bottom-up strategy for PE investment, identifying what type of asset was missing from its overall portfolio, then conducting due diligence to identify the most attractive ones in each category, Ma said.

Henceforward Taikang will switch progressively to a top-down approach. It will determine a rational allocation by asset type, based on an analysis of each potential class in terms of liquidity, return or risk profile, Ma said. The company wants to create a portfolio which is based on a more rational distribution of risk and return.

The conference also heard that China’s high-net-worth individuals are becoming more open to asset-allocation advice and moving away from a purely product-focused strategy. 

As part of this change in PE strategy, and after advice from some specialist consultancies, Taikang has embarked on decreasing its emerging market exposure in favour of investments in developed markets. Thanks to a richer and more diversified range of investment products, developed markets permit a more balanced portfolio with more consistent returns and lower risks, Ma said.

Unfortunately, China increased its capital controls just as Taikang launched this change. “So we are now having to slow down offshore investments,” Ma said, "and so we are focusing on constructing a new PE portfolio onshore". 

Fund house selection

Ma also explained that Taikang’s PE team members had used their accumulated experience since 2013 to begin strengthening their PE manager selection process to reduce risk and optimise returns.

Taikang Investments currently has about Rmb1.1 trillion ($165 billion) of mixed assets under management. About half of this is from Taikang Life, while the other half is from external asset owners such as middle and small insurers, enterprise annuities and the National Social Security Fund.

The fund house is considered to do a good job managing third-party assets when evaluated against other asset managers from the insurance sector, a senior government official overseeing the insurance industry told AsianInvestor in Beijing, on condition of anonymity.

Ma said that as a consequence of the PE team’s comprehensive review of performance they will increasingly evaluate PE managers on a broader range of factors rather than just investment returns. These may include infrastructure buildup, investment clearing, fair dealing, profit sharing, and compliance.

Compliance, he stressed, is becoming a key area of focus for the whole industry as well as a significant risk. “The compliance component on its own may in some cases be sufficient to disqualify a PE manager,” Ma said.

“If a PE manager is not good enough in operations, even if it has a good performance history, sorry we may not invest in it because the operational gaps may represent significant additional risk to us,” he added.

Ma acknowledged that Taikang is not yet a sophisticated investor in the PE space, and that “even mid-to-small institutions such as family offices have [in some cases] more maturity and experience than us”.

“We are still learning and the learning curve is very steep,” he added.

Ma told the meeting that there was a general concern in the industry to improve the effectiveness of PE manager selection. However, this was severely hindered by a lack of accurate databases with sufficient China transaction history to allow meaningful PE manager performance benchmarks. Consequently real performance was still hard to establish and there was as yet no consistent basis for comparison.

On the other hand they had found it helpful that “some FoFs (fund of funds) have very good data after having invested in dozens of PE funds over the years,” Ma said. "Their data is solid as they are consistent, accurate and detailed," he added.

Other challenges

Other key challenges for PEs investing in China include the high liquidity requirements of asset owning clients as well as the recruitiment and retention of talent, Ma said.

For insurers in China, the sale of insurance products is still relatively unprofitable, so “we don’t have much surplus to invest”, Ma said. As a consequence the capital his firm is investing consists largely of premium income, and Taikang Life has stipulated very high liquidity requirements for portfolio PE investments, he added.

Ma also explained the crucial importance of attracting and retaining appropriate talent. 'We go way beyond simply giving out mandates to managers. Taikang also has direct investments in property, and roads, as well as in pre-IPO (initial public offering) deals, so we need a team that is capable of assuring these very different  investments are tracked and optimised."

"Retaining these skills is another challenge again, as we face constant competition from PE firms," Ma said. “We had nearly 30 staff in our PE team at peak; now we have 24.” In reality remuneration at a big group may not be as attractive as in the independent PE fund firms, he added.

Indeed, talented individuals with good potential are fiercely hunted in the market. One reason is that domestic financial markets are steadily expanding and becoming increasingly complex. The most recent example of this was the introduction of a range of futures and options, said Frank Wu, China general manager and chief representative of Alternative Investment Management Association, also on the panel with Ma.

"To deal with an increasingly complex regulatory environment, we have to constantly refresh our professional education and skills-building," Wu said.