HSBC Life Hong Kong plans to boost investments in private credit and private equity in order to capitalise on attractive opportunities amid high rates and a looming recession, according to the insurance company’s Chief Investment Officer William Chan.
From 2024 to 2026, the insurer will look to double its new commitment to private equity to up to $2 billion per year, and deploy up to $1.5 billion in new capital to private credit annually.
This is up from the previously planned $1 billion each year to the two asset classes respectively.
When the market anticipated the US Federal Reserve to cut rates as soon as in the first half of this year, Chan believes the market may have assigned too high a probability to a soft landing, since it typically takes the economy 12 to 18 months to respond to central bank policies, leaving room for policy overshooting or undershooting.
Indicators like bank credit tightening and the decline in household savings and corporate earnings are pointing to “not too low” recession odds, he noted.
“I think the reality is that nobody has a crystal ball, and we can’t put all eggs into one basket,” Chan told AsianInvestor, stressing that with all the uncertainties, asset allocation strategies must be based on a return on risk comparison.
Hence, the insurer is moderately underweight listed equity, and overweight alternative and fixed income assets.
HSBC Life Hong Kong managed about $12 billion in alternative assets across major asset classes. Its assets are denominated in US and Hong Kong dollars.
Under the current high-floating rate environment, Chan said private credit has been offering the insurer “exceptional” risk-adjusted returns.
A key focus for the company in the private credit universe is unrated senior secured direct lending in the US and Europe, which is offering over 10% in gross returns, exceeding equity return assumptions.
Senior secured direct lending consists of loans that have seniority in the capital structure and downside protection from collateral.
Chan noted the risk charge for such debts is in the mid-teens under Hong Kong’s new risk-based capital regime for insurers, which necessitates capital reserves proportional to mark-to-market risks.
“So, you have this quite unique and favourable combination of very high returns with a relatively low risk charge. The return on risk just stands out among all asset classes. And it is indeed why we are deploying a significant amount of new capital into private credit,” Chan said.
The company’s private debt exposure is US- and Europe-centric. Although there has been increased private credit opportunities in Asia, Chan noted the market is not as mature, with limited opportunities.
The life insurer also plans to expand the scope of its private credit exposure. These include energy transition infrastructure debt and European senior direct lending.
In January of last year, HSBC Asset Management, the insurer’s in-house asset manager, added Green Transition Partners Limited, a specialist company focused on energy transition infrastructure, to its Asia alternative investment team.
HSBC Life Hong Kong entrusts a group of around 20 general partners (GPs) to manage its outsourced private credit positions. Each GP manages a diversified portfolio across sectors, borrowers, and more, which helps the insurer mitigate risk per lending.
This is unlike its private equity strategies, where the insurer invests through about 100 GPs to help it achieve diversification across strategies, styles, and geographies.
HSBC Life Hong Kong also makes direct private credit investments in loans originated by the HSBC global banking network, which also provide a “very good” return on risk that is similar to other externally managed positions, Chan said.
DIVERSE PE VINTAGES
Chan noted that throughout history, private equity vintages during recessionary periods tended to subsequently generate higher returns, since more opportunities at the cheaper valuation would turn up when the market was under stress.
“As we see material probability for recession in 2024, maintaining private equity deployment would help us to capture potentially attractive entry opportunities,” he said.
Through annual deployment to the asset class, the insurer aims at achieving diversification across vintages to benefit from opportunities of different periods.
“For this very long-term investment of up to 10-plus years, you have to diversify your entry points so that your exit points are also diverse,” Chan said.
Preferred sectors are healthcare and technology, especially software companies with a steady income stream, as the insurer eyes their long-term growth potential as well as resilience across macroeconomic cycles.
Like private credit, its core exposure to private equity is in the US and Europe, where there are more opportunities available.
Noting that private equity investments in India and Japan have been growing quickly, Chan stressed that their interest in Asia depends on the availability of fund vehicles in the region.
The insurer relies on the capabilities of the London-based private equity team under HSBC Asset Management to execute direct private equity fund investments. It doesn’t favour fund of funds (FOF), with the additional layer of fees.
The increase of alternative assets in the portfolio is also driven by market demand on the life insurance company’s products that have a high proportion in growth assets, which include public and private equities.
On real estate investments, Chan noted that a high-rate environment is generally not favourable for the asset class. The insurer is waiting on the sidelines for a turning point on the Fed’s policy before it starts adding positions, saying it is premature to be aggressive currently.
It has direct real estate exposure in Hong Kong in what it calls specialist sectors such as data centres, logistics, and cold storage. Overseas exposure is via real estate investment trusts (REITs) and unlisted real estate funds.
In the long term, the insurer aims to expand its investments in physical real estate to the rest of the Asia Pacific, including the Greater Bay Area and Singapore.
It is working with HSBC Asset Management to see how to expand its capabilities in the asset class and grow direct exposure.
The focus will remain on specialist projects with their long-term stable demand and resilience relative to cycles, as opposed to more general commercial properties, Chan said.