Asian life insurers scout for buyout funds amid market turmoil

Life insurance companies are eyeing buyout funds to include in their alternative portfolios this year as traditional private equity investments take a hit from rising interest rates and slowing initial public offerings.

“This year we prefer buyout funds for our private equity investment because we think control of investment and operational expertise has been a critical lever for value creation. It has also been a stabilising force in a market full of stress and volatility,” said one Asia Pacific alternative investment manager of a multinational life insurance company.

Preqin data showed that globally, the total fundraising volume of private equity buyout funds year-to-date in 2022 was just $212.9 billion, much lower than the $357.1 billion in 2021, $307.7 billion in 2020, and $412.6 billion in 2019.

However, the year-to-date fundraising activities in Asia Pacific in 2022 have surpassed full-year totals in 2021 and 2020, reaching $31.4 billion, while the past two years registered a volume of $28.8 billion and $30.3 billion respectively.

Compared with Asia Pacific, fundraising in North America and Europe has slowed dramatically year-to-date.

According to a Hong Kong chief investment officer of another multinational life insurance company, the firm continues to deploy assets in the private market when there’s a capital call, preferring to invest in long-term sectors that are not cyclical, or co-related, to stock markets and the economic cycle.

As a result, buyout assets have become attractive compared with venture capital and pre-IPO shares, he said.

Through buyout positions, LPs usually have a say in portfolio companies’ operation and management, and thus have control over the performance.

“As portfolio companies of buyout funds are mature businesses rather than part of a growth cycle, buyout funds are like a value stock investment in the private market,” said the alternative investment lead.

“This is a market trend across all asset owners in Asia, not just life insurance companies,” she told AsianInvestor.

GROWTH DRIVEN

This year, her team have invested in both pan-Asia and China-focus buyout funds across various sectors, including consumer, healthcare, and industrial sectors. Within those categories, they still prefer sectors with growth prospects.

“Even though the market is not doing well - and people are saying the recession is probably going to overhang - it's not likely to be universal across everything," she said. "When you're talking to the general partners (GPs) to know what is going on in the market, you can always define some dispersion and identify what you can do."

Globally, William Yea, principal at Coller Capital, a company specialised in private equity secondary market, said a lot of the GP-led secondaries in the buyout space have been driven by attractive high quality, more growth style assets across sectors.

“In particular in the last few years, we've seen some sectors perform as they've had great tailwinds from digitalisation, technology, and Covid effect,” Yea told AsianInvestor during a media briefing.

According to the Preqin Future of Alternatives 2027 report released in early October, North American private equity buyout performance is expected to remain the strongest of any major region over the next five years.

North American buyout funds generated annualised returns of 16.7% from 2015 to 2021 but are expected to generate a relatively softer 14.5% per year until 2027.

This compares with an expected 14.3% return for European buyouts and 11.2% for Asia-Pacific buyouts, largely due to the comparative economic challenges faced by Europe and the Asia-Pacific region, the report said.

Private equity historic and forecast performance (Source: Preqin)

As far as Asia is concerned, Yea said they’ve increasingly seen buyout assets come to market in the secondary space on the GP-led side, driven by dynamics in different markets.

He noted that each market in Asia has its own characteristics, spreading out across sectors such as healthcare, digitalisation, and industrials.

They expect diversified themes across Asian economies will continue to perform with different growth trajectories over the next five years.