This month it emerged that 45 percent of Asia’s insurance companies intend to allocate more than 15 percent of their portfolio to private asset classes over the next three years, nearly doubling the proportion that do so already.
The source of this piece of insight was BlackRock. As part of a study drawing on responses from Asia-based insurers with over $6.2 trillion in assets between them, Blackrock showed that of the firms that plan to take on more risk, 73 percent are doing so in pursuit of enhanced investment income, while 60 percent are wanting to increase diversification.
“Insurers in Asia-Pacific are having to make a great migration towards higher-yielding opportunities, especially private asset classes, to diversify income streams and maintain returns on equity,” David Lomas, global head of BlackRock’s insurance asset management unit, says.
The ramifications could be great for private equity across Asia: while the region’s more developed economies, such as Korea and Japan, have permitted insurance companies to invest in private equity for some time, now emerging markets like China and India are as well.
In particular, regulatory changes in China mean that a huge war-chest of capital might become available for private equity. (According to Reuters citing official government data, China’s insurance companies had assets of RMB 8.289 trillion ($1.36 trillion; €991 billion) at the end of 2013.)
In February, China’s insurance regulator increased the percentage of assets insurance companies may invest in private equity from 25 to 30 percent. The change was part of a new set of rules being rolled out, which included greater freedom to invest in offshore private equity funds.
“For many years it was prohibited for Chinese insurers to invest in private equity, and now that it is permitted and even encouraged – that is the biggest change we’ve seen in the [Asian] market,” Andrew Ostrognai, partner at Debevoise & Plimpton, says.
Thus far, however, Chinese insurers have been slow to take advantage. “They have been tentatively making both fund and direct investments into China, but not on a grand scale,” Dean Collins, partner at Dechert in Singapore, observes.
Concerned with risk, the interest lies more in offshore private equity as developed markets are arguably the safest place to invest.
Says Ostrognai: “Chinese insurance companies are looking to deploy capital in private equity, but the sense is a lot of that will be for North America and Europe. Given that this is a new asset class they are trying out, they are probably going with funds that have much longer track records.”
One example is China Reinsurance Group, founded by the Ministry of Finance and Central Huijin Investment Corporation, which according to sources has invested in the Kohlberg Kravis Roberts North America Fund XI with a $30 million commitment. KKR declined to comment.
China Life Insurance (CLI), one of the world’s largest insurance companies, has acted too, although arguably hedged its bet even more. The firm acquired a stake in global private equity firm TPG Capital’s management company for $250 million in August this year, and is now said to own between 2 percent and 5 percent of the business.
Ostrognai comments: “[With this deal, CLI] is still taking a bet on private equity, but if one is investing at the top level and getting slices of all sorts of different funds, it is less risky simply because of diversification.”
It appears that while insurers are open to the idea of private equity, they are treading carefully.