Insurers in the Asia-Pacific region are cautiously committed to investing in private debt. But although they are wary about the effect of government stimulus programmes, they expect the asset class to continue growing.
The region’s insurance market is growing rapidly, as the continent’s huge population becomes wealthier and demands financial services. Five of the top 10 largest insurers by assets under management are Asian, and growth in China and Southeast Asia has been dramatic in recent years.
Bruce Pan, managing director and head of private debt at Ping An Overseas Securities, the overseas investments and asset management platform of Ping An Group, notes that insurance companies “share many common characteristics with other institutional investors. They are very long-term investors, with certain cashflow requirements.”
There is a huge variety of regulatory regimes for insurance companies across Asia-Pacific. However, market players say that insurers tend to behave much like other institutional investors in the region when it comes to private debt investments and do not have specific requirements.
Cautious approach in Asia
Asian insurers have generally been recent and cautious investors in private debt, and have tended to invest outside the region in US and European funds. Masashi Ono, deputy general manager at Japan’s Dai Ichi Life, said the combination of lower-rated companies and lower sovereign ratings in Asia means institutions in the region are more inclined to look outside for private debt opportunities.
The pandemic has naturally exacerbated Asian insurance companies’ caution, though Pan noted that, after a hiatus early in the pandemic, businesses adapted quickly: “Since the second half of last year, the investment community has pretty much returned to normal, with people making decisions, and not only in our private debt sector.”
Some, especially those with a track record in private debt, have continued to invest in the sector, while less experienced investors seem more inclined to wait and see. Tsutomu Ishida, deputy general manager at Tokio Marine & Nichido Fire Insurance, said: “We have not changed our approach entirely and have been still selectively investing in private debt, although there is no denying we would prefer a more stable and predictable environment.
“At the same time, however, there are unique opportunistic credit investment opportunities available in the current market environment and we can enjoy a premium in a difficult environment, although that spread is now disappearing.”
However, Ono says Dai Ichi Life, which had made a number of private debt investments during its first foray into the sector, is putting on further investments in the asset class. “Credit markets all over the world are supported by government stimulus programmes, so we are a little concerned about this and are adopting a wait-and-see approach for the moment.”
The big question for a lot of investors in private debt is the likely extent of distressed opportunities in the asset class. Ishida expects the true extent of distress to only become clear once the pandemic is well and truly over and stimulus programmes are withdrawn. Ono adds that it will be easier to take a stance on the market once “the peak of defaults is over”.
However, market participants say they are reluctant to chase ‘covid-linked’ opportunities, either in distress or in focusing specifically on markets that seem to be doing relatively well. “We don’t chase opportunities in countries where they are recovering faster,” Pan said. “That is more for equity investors who may need to identify which region will recover earlier or stronger and get in there first. We are looking at the returns versus the risk over the life of each investment.”
In the longer term, Asian insurers expect more growth for the private debt market both in their region and elsewhere, primarily due to demand from borrowers and the continued retreat of banks from transactions that are not straightforward. “A lot of the deals come from the leveraged buyout market, where there is still very strong activity and private equity investment is also growing, year after year,” Pan said. “So, we still see a growth market in private debt.”
Insurers are an important part of the private debt ecosystem. As long as their complex needs are met, they view the asset class as offering a good solution that provides both yield and crucial low capital-cost assets to help manage regulatory expectations.