HKMA Exchange Fund explores PE in healthcare, energy transition
Hong Kong Monetary Authority’s HK$4 trillion ($509.6 billion) Exchange Fund will continue to explore private equity investments in healthcare, technology, energy transition and infrastructure, including in emerging markets, it told AsianInvestor.
However, the main fund management industry body in Hong Kong says the HKMA's report card should be marked with 'could try harder' on the ESG front.
Hong Kong's financial chief said in the city’s latest budget that there would be a specific focus on enhancing Hong Kong’s private equity industry and sustainable finance development. The Exchange Fund therefore is set to dedicate allocation to private equity funds managed by smaller local managers, increasing allocation to funds that focus on sustainable investment, he said.
The Exchange Fund’s alternative investment is currently managed under its long-term growth portfolio - established in 2009 and totalling HK$515.3 billion ($65.6 billion) as of the end of 2021 - and accounts for 11.3% of the fund’s total assets under management by end-2021.
The portfolio, with the aim of diversifying risk and enhancing medium-to-long-term return, has 76.2%, or HK$392.5 billion in private equity, with the remainder in real estate.
Outstanding investment commitments in the long-term growth portfolio amounted to HK$225.7 billion by end-2021.
The portfolio has been the Exchange Fund’s star performer so far, contributing to a robust 15.4% annualised return rate from inception in 2009 to 2021. This compares with the 4.8% nominal annualised return of the entire fund from 1994 to 2021.
“The investment performance of the LTGP (long-term growth portfolio) has been satisfactory so far,” an HKMA spokesperson told AsianInvestor. “We will continue to explore potential investment opportunities in industries that can benefit from structural changes, such as healthcare, technology, energy transition,” they said.
Meanwhile, the fund is set to focus on industries that can “counter inflationary pressure and have a low correlation with traditional asset return”, including infrastructure investment.
“We will also continue to explore investment opportunities in emerging markets, including Asia,” the spokesperson added.
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At the end of 2022, the Exchange Fund’s assets under management stood at HK$4.01 trillion, down from HK$4.57 trillion at the end of 2021.
LOCAL LEADER
As one of the city’s largest asset owners, the Exchange Fund is also responsible for the development of local asset management industry.
As disclosed in the latest budget released on February 22, in recent years, the Exchange Fund has established alternative asset portfolios with dedicated allocation to smaller local managers.
“As a next step, such portfolios will cover also private equity funds managed by smaller local managers and those seeking to expand their Hong Kong operations in order to support their continued growth here,” Hong Kong Financial Secretary Paul Chan Mo-po said in the 2023-24 budget.
“In addition, the Exchange Fund will identify and increase allocation to funds that focus on sustainable investment to help consolidate Hong Kong's position as the region's leading sustainable finance platform,” Chan said.
HKMA, Hong Kong’s de facto central bank, declined to give further details of these investment activities and strategies “due to market sensitivity”.
Instead, it told AsianInvestor that the general partners (GPs) it engages are mostly renowned asset management firms equipped with expertise in relevant fields such as market intelligence, investment networks and management platforms.
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“The scope of due diligence work on GPs covers a wide range of topics, including the capability and stability of their investment teams, and their investment performance,” the spokesperson said.
LACK OF GOALS
Unlike its fellow asset owners in Singapore or Japan, HKMA - whose investment strategies for the Exchange Fund are rarely covered at the city's annual budget - has not been very vocal about the Exchange Fund’s sustainable investment agenda.
The local fund management industry, meanwhile, believes there’s a lot more the HKMA could be doing on the ESG front.
“It would send a very important signal if a large equity mandate is given out by the HKMA, the Hong Kong Hospital Authority or other statutory bodies with ESG integration as a mandatory condition," said Sally Wong, chief executive officer of the Hong Kong Investment Funds Association (HKIFA).
"This could help catalyse a focus on capacity development for managers. This is a key element behind development of ESG in Japan and South Korea. It would provide the ‘carrot’ for local managers to build ESG considerations into their operations.
“We applaud HKMA which is already using the ESG integration approach; but it could undertake more initiatives to showcase the commitment to the ESG cause,” Wong told AsianInvestor.
For instance, it could take the lead to invest in higher conviction and deep green strategies as well as committing to pledge a dedicated proportion of investment to climate-focused or green areas, she said.
Temasek, for example, has seeded GenZero with S$5 billion to invest in various decarbonisation strategies. Other examples include the Monetary Authority of Singapore’s (MAS) $2 billion green investments programme, she noted.
“It would be exemplary if the treasury, HKMA, Hospital Authority, and other statutory bodies set ambitious and science-based reduction targets aligned with net zero by 2050 or earlier, and set specific engagement requirements on managers to engage with companies for meaningful greenhouse gas reduction,” Wong said.
So far, HKMA has set a net-zero target by 2050 for the investment portfolio of the Exchange Fund, which consists of assets in the public market. The alternative investment, or the long-term growth portfolio, however, has no such target yet.
“It would be impactful if they also report the carbon footprint, sustainability performance as well as the environmental and social impact of their investments to the public.”