Chinese insurers eying offshore PE, real estate

Chinese insurance firms are looking to invest into offshore alternative assets such as private equity, real estate and infrastructure, says consultancy Towers Watson.

Until last year, only a handful of insurers in the country were permitted to invest in domestic alternatives. But the regulator passed rules last October to allow insurers to put money to work offshore, since when there has been an uptick in inquiries seeking advice about allocating capital offshore, says Richard Tan, head of Asian private markets at Towers Watson.

“The world is their oyster now,” Tan tell AsianInvestor. “They can deploy assets domestically and offshore. We’re being asked [by insurers] how much should they deploy and where?”

Still, Chinese insurance companies are typically conservative and remain cautious when it comes to deploying assets abroad.

“There is a level of caution,” Tan confirms. “But at the same time, underneath that there is a great deal of activity that we as a firm have been involved with, in terms of trying to assist our clients and figuring out what the best moves are to take advantage of the new rules.

“Some are planning aggressive timelines for potential deployment, while others are more careful in terms of seeing the challenges that offshore markets are facing now.”

Preferred strategies and regions vary, although he says he is seeing interest above all in private equity funds investing in distressed and special situations globally.

Energy is another sector that is seeing interest. “We all know energy is a very important sector for China. [Insurers] have therefore chosen it as one of the sectors they’re looking into,” Tan says, noting this includes opportunities in the mainland, as well as Southeast Asia, Eastern Europe and, to a lesser extent, shale gas opportunities in the US*.

“I would say that given how recently [Chinese insurers] can invest offshore, everything is being considered. But I guess as time progresses and they evolve in terms of research, the question arises what will be the best moves of implementation, and will it actually be practical to pursue opportunities in the US energy market?”

Towers Watson is also fielding questions on infrastructure projects and real estate. Not only insurers, but Asian sovereign wealth funds and public pension funds increased allocations to alternatives last year, namely private equity and real estate, with Towers Watson anticipating other institutions to follow suit.

“Pension funds have always been and will remain a very large investor group for top alternatives managers, but the demand from non-pension fund investors such as insurers, endowments and foundations and sovereign wealth funds will likely increase in future,” Tan suggests.

A Towers Watson survey published this week finds that of the top 100 alternative managers’ assets, which total $3.1 trillion in 2012, 36% comes from global pensions, with wealth managers at 19%, insurance companies 9%, sovereign wealth funds 6%, banks 5%, funds of funds 3% and endowments and foundations 2%.

The top four alternative investment managers in terms of assets are Macquarie Group, Bridgewater, CBRE Global Investors and BlackRock.

On Asian foundations and endowments, Tan notes that, year-over-year, “deployment by endowments has been on an upward trend, but whether alternatives will eventually become a significant allocation in their overall portfolio is very hard to tell”.

On the search for yield, Towers Watson expects Asian pensions to increase exposure to real estate and infrastructure as both offer decent returns and provide cash flow.

Recent stock market volatility triggered by liquidity tightening in China also stands to benefit private equity funds, Tan argues, noting that private equity provides more stability.

“Obviously volatility is an issue,” Tan says, noting that during the financial crisis, private equity valuations were, all things considered, reasonably stable. “That stability is very much appreciated by your pension funds and your sovereign wealth funds in particular.”

* See the latest July edition of AsianInvestor magazine for a feature on US shale gas