With competition for illiquid assets sky-high and interest rates at record lows, insurance companies that can originate their own private lending deals to generate yield have a competitive benefit. But while this is a trend in Europe, it is not seen to be in Asia, despite appetite for such strategies.

“If we could originate assets, it would be a big advantage,” one Hong Kong-based chief investment officer at a large insurer told AsianInvestor. “Unfortunately we can only award external mandates, so we cannot do it.

“In essence, we use the old model, which is much less flexible, while internal sourcing is the more up-to-date process,” he added.

Alexandre Mincier, Invesco

Sourcing private assets internally is a trend seen mainly in Europe, but Asian insurers are trying it as well, said Alex Mincier, global head of insurance at US fund house Invesco. “Internal origination requires resources, however. So this trend usually concerns big insurers – very rarely medium-sized ones.”

Certainly, the Asia head of insurance coverage at another big US asset manager does not see this self-sourcing of deals as a trend among Asia Pacific insurers.

"Direct investment is already happening but is mostly limited to investment in insurers’ home countries," he said on condition of anonymity. This trend is most notable in markets like China, Korea, Japan and Taiwan, added the Hong Kong-based executive. Those countries are home to the region’s biggest insurance firms.

“The key challenge to doing direct investment in-house is lack of expertise in alternative asset classes across geographic locations outside of their home country,” he added.

Many asset managers have talked about building their own direct lending platforms, but progress has been slow, said Bruce Porteous, Edinburgh-based head of global insurance specialists at Aberdeen Standard Investments.

“They have to invest in building the infrastructure and commit to projects before they know that their clients will fund the projects,” he added. “Asset managers with captive insurers may progress, but otherwise it could be hard to get started.”

M&G Investments, part of UK insurer Prudential, is making a go of that in Asia. In December last year it transferred Matthew O'Sullivan to Singapore to build and run a credit and alternatives origination team.

BUILDING ORIGINATION EXPERIENCE

On the asset owner side, British savings and insurance group Legal & General (L&G) has made progress in sourcing its own lending deals domestically.

Having in-house origination capabilities is a key competitive advantage, said Sumit Mehta, head of investment solutions for L&G's retirement division (LGRI), which manages £80 billion ($103 billion) of pension money.

“A big part of our strategy is that rather than join everybody chasing available assets – which are increasingly scarce in a world of negative yields – we want to create assets,” he told AsianInvestor.

Sumit Mehta,
Legal & General

L&G has two units doing this: Legal & General Investment Management, which operates across public and private markets, and most notably Legal & General Capital (LGC), the group’s principal alternative asset originator. (See also box below, 'Benefits and challenges of self-sourcing assets'.) 

“In a climate like this, we’ve been able to find really good opportunities in private markets, where we’ve been able to still maintain a prudent approach to risk, such as by ensuring we have covenants or securities on loans or debt,” Mehta added.

A typical response by investors to the current low-rate environment – especially since further stimulus and monetary easing measures since the Covid market crash in March – has been to hunt for yield by going down the credit quality curve towards cyclical and leveraged sectors, Mehta said.

But LGRI has tried to avoid doing so. Hence 33% of its bond portfolio is rated BBB, the same proportion as at the end of last year. Being able to self-originate assets has been beneficial.

For instance, L&G provided £65 million this year to fund construction of the Lumen building in Newcastle, northeast England, in partnership with Newcastle University and Newcastle City Council. It is a 106,000 square foot grade-A office that will operate as a science and technology hub.

Separately, L&G invested £400 million in July last year in a regeneration project in Welsh capital city Cardiff, called Cardiff Central Square, in partnership with the Welsh government and Rightacres Property.

Transactions such as the Lumen development are seen as less likely to happen in Asia. The L&G deal is interesting but also hard to replicate in the region since there is no perceived economic or financial value in investing in university research centres, said the unnamed head of Asia insurance coverage. “Asian insurers would invest for economic reasons or to support government calls for domestic infrastructure projects.”

A trend he said he was seeing among insurers post-pandemic was that of diversification and a move away from single projects because of their higher risk.

New risk-based capital rules in various countries in Asia – which require them to set aside higher levels of capital in proportion to perceived higher-risk assets being held in the portfolio – tend to discourage concentration risk, the executive added. “This is especially true for overseas alternative investment after Covid.”

BENEFITS AND CHALLENGES OF SELF-SOURCING ASSETS

Legal & General has been sourcing its own assets through Legal & General Capital since 2013 or earlier, said Sumit Mehta, head of investment solutions at Legal & General Retirement Institutional (LGRI).

He said he could not confirm whether it had done so outside the UK as yet, though LGRI is increasing its exposure to Asia.

“We are looking continually globally for opportunities in line with our strategic vision and key themes,” Mehta added. “However, our portfolio’s international diversification is more advanced on the public side than the private side.”

Self-sourcing assets offers various benefits, he noted. It allows L&G to invest directly in the areas and themes that it believes are most beneficial for the economy, in line with the firm’s vision of “inclusive capitalism”.

It also allows the group to tailor assets in terms of cashflows and risk profile as appropriate for its funds, and affords a high level of control.

There are also of course significant barriers to creating origination capability. It requires significant upfront resources and ongoing capital commitment that needs to be carefully managed, said Mehta.