FWD changing its approach to private equity

The group's CIO explains how changing market conditions are prompting it to look at private equity opportunities more discerningly – and why it's important to keep portfolios flexible.
FWD changing its approach to private equity

Hong Kong-based insurer FWD is changing the way it approaches private equity investing against a backdrop of investors continuing to chase private-market assets aggressively even as global monetary conditions tighten.

With ultra-low interest rates prevalent for most of the past decade, large investors including Japan’s Government Pension Investment Fund and China Investment Corporation have jumped on the alternatives bandwagon in search of higher returns and that extra piece of alpha.

But with so many investors chasing private market deals, the risk of overcrowding has grown strongly.

“It is concerning to see so much money chasing relatively fewer deals,” Paul Carrett, group chief investment officer of FWD, the insurance business of Pacific Century Group, told AsianInvestor this month.

And that is especially true in the case of private equity investing, which accounts for a little over half of private market fundraising globally, according to Preqin data.

“The amount of money being raised by private equity is probably disproportionately large in our view compared to the opportunities and will lead to lower [internal rates of return],” he said.

To be sure, new money raised in private capital markets – for infrastructure, real estate and natural resource investments as well as for private equity and debt – fell 17% year-on-year to $789 billion in 2018, according to Preqin data.

But that's still a huge pot of money awaiting investment – which also excludes any funds left over from 2017 when a record amount was raised, bringing the trillion-dollar-mark into view.

Carrett said the insurer had changed the way it allocates money to private equity, partly because global monetary conditions are being tightened, with US interest rates raised nine times times since late 2015 and the Federal Reserve slowly slimming its bloated balance sheet.

Paul Carrett

“Generic [private equity] funds have worked well over the past decade, but now investors have to become more thoughtful about how they allocate to private equity. We want to find the right managers who can survive more volatile times and are actively managing their portfolio of companies,” Carrett said.

He noted that it is important for investors to seek out less crowded segments of private equity, although it can be hard to find experts in these areas.

“If a manager is in a space where the barriers to entry are low or in a generic category, and there are many competitors already, you’d think it would be hard to raise money but it’s not. It’s also where you don’t want to be,” he said.

Instead, the insurer looks for specialists with expertise in areas such as the ability to transform the businesses they buy, helping companies grow, providing companies access to other experts in finance, human resources, taxation and the like.

“We probably have a bias towards industry specialists,” he added.

Carrett is now more bearish about alternatives more broadly and has also voiced concerns about the private debt market. But he adds, “when we find good managers we are more than happy to allocate.”

After all, private market investments have the potential to generate higher alpha from operational improvements – something, he said, isn’t available from listed equities.

In general, FWD allocates anywhere between 5% and 10% to alternatives in its investment portfolio, Carrett said. FWD's group assets totalled around $28 billion at the end of September 2018.


After a rollercoaster 2018, 2019 seems to have started on a sombre note, with investors keeping a watchful eye on several potential flashpoints for the global economy.

As the IMF notes in its latest world economic outlook update, there are a range of possible triggers beyond escalating trade tensions that could lead to a further deterioration in risk sentiment and growth prospects. These include a ‘no-deal’ UK withdrawal from the European Union and a greater-than-expected economic slowdown in China, it said.

What's more, Carrett warned, the global economy's capacity to deal with any such complications is lower than it was before.

As he pointed out, interest rates had been much higher until 2007-2008, allowing central banks around the world to slash them to cope with the snowballing global financial crisis. “Today, rates are at such low levels that we can’t do that anymore.”

In addition, central banks cannot expand their balance sheets anymore without adverse consequences and countries are no longer co-operating with each other as they did before.

So what can investors do to protect themselves in such an environment?

“You try to ensure you are positioned such that you are not a forced seller of any assets because of capital calls or market moves,” Carrett said.

He noted the way most institutions are typically structured and operate makes it tough for them to move quickly and react to rapidly unfolding market events.

“[Investors need to] think ahead of what opportunities might arise and create buckets in the portfolio that can take advantage of such events, when others are forced sellers of assets. You can buy those assets at a discount,” Carrett said.

“Creating that flexibility in the portfolio is a huge focus for us – ensuring that our risk management systems are up to date, for instance,” he added.

It might sound like boring work but its value comes to the fore during times of crisis. “That is where you can make a lot of money, as you can be set up to take advantage of such [above mentioned] situations,” he said.

For further insight and analysis into how insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12 and its inaugural sister event in Singapore on March 14. For more information, please click here.

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