Private equity is set to enjoy the most rapid growth in life insurer portfolios over the coming few years as the organisations raise their general exposure to alternative asset classes, predicts Jethro Goodchild, Hong Kong chief investment officer of FWD.

Lifers are also set to raise their interest in environmental, social and governance principles and look more to infrastructure debt, noted other insurance executives. 

"The pure play and high-returning attractiveness of private equity is the likely place for the largest allocation or the biggest increase,” said Goodchild, speaking on a panel at AsianInvestor’s Insurance Investment Week on Thursday (March 18).

The CIO is practising what he preaches. FWD Hong Kong has invested about $1.8 billion (12%) of its $15 billion portfolio into alternatives, which typically include real estate, private equity, private debt, infrastructure, commodities and hedge funds. Goodchild added that these investments typically generated annual investment returns “in the mid-teens".

He believes that while venture capital is popular, the relative size and capacity of more established private equity strategies makes them more attractive for insurers.

Arthur Seter, former deputy CIO of New York Life Insurance, is also a fan of private equity.

Jethro Goodchild

“Given the lower [interest] rates, if one is to look at allocating some risk dollars and capital to equities, private equity certainly should be at the top of that list,” said Seter, speaking on the same panel.

He also noted that private equity, and equities generally, could offer a hedge against long-term inflation, because the value of equities typically rise with prices. 

In addition, Seter believes mezzanine funds, which straddle equity and debt risk, offer a potential alternative investment to mezzanine funds as an alternative to high yield bonds, while taxable US municipal bonds could help lifers diversify from their corporate bond exposure.

ESG APPEAL

Asset owners across the world have been gradually discussing a desire to raise their exposure to alternatives.

A study by consultancy Broadridge last year forecast that institutional investors across Asia could double their alternative asset allocations by 2024. Similarly, alternatives data provider Preqin predicts alternative assets globally will rise 60% by 2025.

Insurance companies' portfolios are traditionally skewed towards fixed income, and a prolonged low level of interest rates has become a drag on their investment returns. With higher rated fixed income in particular failing to offer much in the way of returns, executives say insurers are increasingly looking at alternative asset classes that combine potentially high yields with enough capacity to absorb sizeable sums of investment.

Arthur Seter
 

Insurers also look set to increasingly emphasise environmental, social and governance (ESG) principles and weigh new regulations as they make portfolio decisions in the coming years, said Alexandre Broggi, senior portfolio manager for Asia infrastructure debt investments at HSBC Asset Management.

Scott Hartz, CIO of Manulife Financial, argued earlier in the day that commodities such as agriculture and timber offered insurers an ESG-friendly asset class that could see improving performance. 

“Timber is one of the few asset classes which if managed in a sustainable fashion is actually net sink of carbon,” he said during the day's opening session. He acknowledged the asset had underperformed in the last decade but said it would gain demand due to the pandemic-led growth in homebuilding, predicting it could offer high-single-digit returns. 

INFRASTRUCTURE DEBT DEMAND

Broggi also highlighted the prospects of insurers building more investments into infrastructure debt. He argued that the asset class provides an opportunity for investors to marry yield and sustainability objectives.

“Infrastructure obviously has an immense part to play in [ESG] and that's been part of our conversation in with a lot of Asian institutional investor clients,” he said.

 
 

Indeed, Broggi argued that global infrastructure debt could offer a “$1 trillion opportunity every year” – this was the case even in 2020, despite the challenges brought about by Covid-19.

Currently infrastructure debt makes up “a very small proportion” of investors’ balance sheets, particularly in Asia, he noted, adding that an ideal infrastructure debt portfolio should comprise 10 to 15 assets of $20 million to $25 million each.

Alexandre Broggi

A big downside of investing into private assets is their relative illiquidity, which makes them difficult to exit at short notice.

But all panellists agreed that insurers, as long-term investors with illiquid liabilities, were well poised to take advantage of illiquidity premia.

“It really is not a tactical allocation, because it does take some time for private equity managers to put the money to work,” explained Seter.

A greater emphasis on alternative investments also provides an opportunity for insurers to demonstrate value-add to customers, argued Goodchild.

“With the democratisation of investing and retail investors getting earlier access up the value chain, it's going to become even more important that insurers get unique access [to alternatives] for their clients," he added.