Given the backdrop of low interest rates, regional insurers would do well to diversify into more private assets, including private credit, however experts say building professional on-the-ground teams and selecting asset managers could be a headache, panelists said at the Insurance Investment Breakfast Briefing held by AsianInvestor on Friday, December 3.
“Under the low interest rates, it's very challenging from an insurers perspective because we know we still have to hit return targets," Fanda Ho, head of investments at Prudential Hong Kong, told in the investment briefing.
"But as we can all see, the US dollar fixed income market dominates, so we will also look at other currencies for risk diversification. Also, we should have more private credit assets in our portfolios for a greater illiquidity premium,” she said.
“Dream-come-true assets are very hard to find, but what we need to do is to balance all these different components,” she said, adding that there were now more private assets to choose from compared with previous years.
Indeed, the market has been growing, enabling asset owners plenty of choice when supplementing their private asset portfolios.
Assets under management of funds primarily involved in direct lending surged to $412 billion at end-2020—including nearly $150 billion in “dry powder” available to buy additional private debt assets—according to financial data provider Preqin.
This came as institutional investors with a fixed-income allocation, including insurers, pensions, endowments, and sovereign wealth funds, have increasingly tapped directly or indirectly into the market.
Despite this, asset owners are also facing two problems: how to select the right managers to lead the investment, and how to build up on-the-ground teams in newly targeted markets.
"We have to look at the diversification through a few different lenses. Each of these asset classes has a very different risk profile underlying drivers of supply and demand and different levels of cyclicality or coalitions to the economic cycle,” another panellist told the same session, noting that selecting managers could be challenging as well.
“For manager selection, diversification is quite important, particularly because in the private credit space there's less history and it's less mature compared with private equity as an asset class,” he added.
Gerald Posthuma, CIO of Manulife, said his firm had been leveraging more global talent in its Asia market as it aimed to penetrate further into the region.
“Our diversification is one of necessity in Asia. We found that at some point in time, we were not able to support our liabilities from a local perspective so we started leveraging our US teams,” Posthuma told the event.
He said that, as far as global balance sheets were concerned, probably about 20-30% of private credit was in the US and, in Asia, the figure stood at about 10% where there was greater scope to push into the region.
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