Insurance companies picked private equity as the asset class most likely to deliver the highest returns in 2016, according to the Goldman Sachs Asset Management (GSAM) Insurance Survey.
In ranking various asset classes expected to make the highest returns for insurers this year, the biggest portion of respondents (17 percent) picked private equity. The second most popular was government and agency debt at 12 percent. Only 1 percent of respondents picked private equity as the asset class likely to realise the lowest returns, while emerging market equities were picked by 25 percent of respondents as the lowest returning asset class.
Insurers had picked private equity for highest returns last year, as well, along with US equities and European equities.
“Generally, the global insurance industry is either well-capitalised or over-capitalised; that means they have excess capital to put to work,” GSAM Insurance Asset Management managing director Mike Siegel told Private Equity International. “Private equity is very capital-consuming, but if you’re in a capital-excess position, that’s alright.”
He added that insurers are currently holding a lot, if not excess, liquidity in their investments, enabling them to tolerate illiquidity and earn extra returns on illiquidity premiums. When asked whether insurance companies have a bigger capacity for illiquidity than other limited partners in private equity, Siegel answered, “Absolutely.”
Private equity was also the most popular asset class for insurers to increase their allocation in the next 12 months, along with US investment grade corporates and infrastructure debt. Respondents said they plan to raise their allocation by 24 percent in each of the three asset classes. Last year, they had picked private equity, commercial mortgage loans, mid-market loans and infrastructure debt.
Overall, 26 percent of insurance companies in the survey said they will increase and another 26 percent said they will maintain their allocation to private equity. Just 3 percent said they will decrease allocations, while 44 percent said they do not invest in private equity.
And finally, a slightly larger portion of respondents, at 27 percent, said they will outsource investments in private equity to third-party asset managers, versus 22 percent last year.