Infrastructure is becoming an increasingly important part of Hyundai Marine & Fire Insurance’s investment strategy as the outlook for returns becomes more crimped, so it wants to cast a wider net for assets.
Given the added risks involved, though, it has a highly calibrated approach, partly shaped by the private equity experiences of its infrastructure head, Jake Lee.
The $36 billion Korean insurer has already diversified its infrastructure from its home market to the UK and US, having more than tripled its overall alternatives allocation from around 7% five years ago to 25% now.
According to Lee, it has $3 billion of its total assets under management in infrastructure, including airports and highways.
“The first feeling I had when I first moved to infrastructure was how safe infrastructure investments are. Given the late stage of the cycle, I feel really comfortable,” Lee said at AsianInvestor’s inaugural Access to Alternatives Forum on Tuesday.
“[But] with a lot of money chasing the deals and so many experienced investors, we really feel that there's no free lunch in investing in infrastructure,” he said.
Lee was promoted internally from Hyundai Insurance's private equity division two years ago, according to his LinkedIn profile.
Since a lot of Hyundai Insurance's exposure to infrastructure is through specialist infrastructure funds, the first thing pivotal to its strategy is to ensure its interests are fully aligned with the managers'.
“[The general partner] and [limited partner] relationship hasn't been more important in the current [late-cycle] environment,” he stressed, “GPs have to have their skin in the game.”
If GPs commit their own capital to a project on the same basis as the LP, it's then easier for Hyundai Insurance to make co-investment decisions alongside the fund manager too.
“If we get co-investments with GPs we have already committed to, and then if we are under the same conditions and terms, and they have their skin in the game, then we will go for it,” he said.
But with managers it has never previously worked with, Hyundai Insurance would likely proceed more cautiously when co-investing, Lee said.
Taking measured risks to generate additional returns is just what Hyundai Insurance is keen to do in the current late-stage environment.
That includes investing in emerging markets. But given the long-term nature of infrastructure, it becomes even more important to gauge the additional regulatory and political risks before unleashing that pent-up demand.
“We started our overseas infrastructure programme four or five years ago, but emerging markets is the only area where we can get higher returns than the risks we are taking,” Lee said. “We don't know how long it's going to take but eventually it's where we need to go.”
Delegates at the AsianInvestor forum appear equally eager. In a live poll, 50% of them indicated that the best infrastructure investment opportunities would be in emerging markets going forward, followed by the US (29%), Australia (14%), and Western Europe excluding the UK (7%).
However, Lee's advice is to get a solid footing in developed markets first before diversifying into other geographies, although that's partly in order to manage the investment process internally.
“It's easier to persuade your senior management, and also you have more information in the developed market, and the investment committee will feel more comfortable,” he said.
But after having built up a low volatility portfolio you need to move to other areas like emerging markets to improve your risk/return profile, Lee added.
He likened this layered approach to a private equity investment programme, in which a fund starts off with secondary investments, purchasing existing stakes of private equity funds or portfolio companies from either a fund manager or the company's investors.
In this way, it is possible to skip the initial investment period when losses are typically incurred, to the benefit of the balance sheet, Lee said.
“But when you start with a buyout, you won't see any [profit or loss] or any distribution for the first four years and they, [the investment committee], are going to ask you, ‘what have you done? I want to see some upside. You said buyout is the best, but in the past four years what have you done?’”
In a similar way, when one starts diversifying an infrastructure programme, one cannot start with emerging markets, he concluded.
That said, it's not just new geographies that he is drawn to. Also in Hyundai Insurance's sights are the kind of areas other investors shun, including mid- and up-stream US energy assets.
“We don't see a lot of exit activities in the US mid-stream area and the GPs have a hard time raising money, but we see some upside potential in areas where other LPs are avoiding putting money in,” he said.
How it might exit these investments is another question.