Ping An targets top overseas PE managers, hedges FX risk
Ping An Insurance Group expects healthy long-term performance of its overseas private equity investments as the insurer has full faith in its best-in-class global managers.
At this stage, Ping An doesn’t need to have a large and diversified pool of managers for neither its domestic nor offshore private equity exposures. Instead, it works with successful managers with proven track records, its leadership told AsianInvestor.
“We have to know who these people are, their quality, reputation, past performance, personalities, company culture, and the decision process, etc,” Chief Investment Officer Benjamin Deng said.
“So far, we are not willing to have a super diversified pool of managers where you can get some good managers and bad managers.”
The internal rate of return (IRR) of Ping An’s overseas private equity investments is an average of about 15% each year.
“In certain years, there could be a dip in the performance. But on a long-term basis, the IRR is very, very healthy,” Deng said.
The insurer works with global managers and invests in their global strategies, with a preference for mature-stage private equity.
Unlike its alternative investments in China, where the insurer has started looking at earlier-stage venture capital investing, Ping An doesn’t have much exposure to VC overseas.
In accordance with Chinese foreign exchange controls, institutions’ overseas investments are regulated under the Qualified Domestic Institutional Investor (QDII) program.
As a result, like most Chinese asset owners, only a small fraction of Ping An’s total Rmb4.72 trillion ($652.2 billion) in assets are invested offshore, mainly in developed markets.
Given its limited QDII quota, the insurer puts more overseas assets in private equity for higher long-term returns, as well as for a better liabilities match.
For overseas private equity investments, Ping An looks for managers with different styles and expertise.
“We don't just randomly work with someone,” Deng said. “We work with someone because they are good in certain things that we want to be part of the portfolio.”
Manager selection is a two-stage process: first, a short pool of managers is identified from a broader list, and finalists’ names are further chosen from the shortlist.
After managers are onboarded, Ping An reviews their proposals for projects they are investing in and evaluates other criteria such as ticket sizes.
A single project that exceeds a certain ticket size will need to go through Ping An’s investment committee for due diligence and negotiation of terms.
The insurer is generally not sensitive to the tenor or ticket size of private equity investments, according to Deng. This can range from a few dozen millions of US dollars, to over $1 billion.
MULTI-ASSET APPROACH
With other overseas investments, Ping An allocates to global multi-asset strategies managed by global managers, and doesn’t dictate securities selection.
Deng is currently more bullish on bonds over equities.
“As the rate cut cycle starts and continues, I will start getting more bullish on equity,” Deng said.
The CIO expected the US economy to head toward a soft landing, with the first rate cut only to come in the latter half of 2024.
However, as with other asset owners who have expressed similar sentiments to AsianInvestor in recent days, Deng also had concerns about the concentration of “Magnificent 7” technology stocks in driving US stock performance.
“But are they excessively expensive? Hard to say,” Deng said. “They're still generating a very high volume of cash flow and net income. So, I think there will be room for more growth in these stocks.”
YUAN OUTLOOK
As Ping An’s liabilities are denominated in renminbi, Deng said when the insurer invests globally, it manages currency risk by hedging most investments back to the home currency.
“The last risk I want to take is the currency risk…because it is influenced by so many factors, as big as geopolitics to small things like export-import,” he said.
“So, if possible, if the hedging cost is reasonable, I would always choose to hedge back to my home currency rather than leave it naked in the foreign currency.
“But again, if the hedging cost is prohibitively high and I do have a strong conviction that the dollar is going up against RMB, then I'll take that tactical view,” he added.
The Chinese yuan has been weakening against the dollar in 2024, down from Rmb7.08 per US dollar to Rmb7.24 to the dollar as of Monday.
Deng thought the yuan could remain stable against the US currency at this stage, and start closing in on the Rmb7.15-7.20 per US dollar range after the first rate cut by the Federal Reserve.
“China is lowering rates too. So, in that case, we don't see a drastic change in the currency rate,” he said.