Why Prudential is prioritising private assets and ESG
Prudential Corporation Asia (PCA) is likely to gradually increase its allocation to alternatives such as private equity, private credit and infrastructure, and is particularly keen to pinpoint such investments in Asia, its chief investment officer has revealed.
It has also begun demanding that the external asset managers it hires embody environmental, social and governance (ESG) standards.
Speaking to AsianInvestor after PCA was last month named best insurance company in our annual Institutional Excellence Awards, Stephan van Vliet noted that the company had come through a great deal of senior executive change since he joined from Pinebridge in May 2017.
Prudential Corporation Asia (PCA) has spent the past two years hiring country CIOs across core markets to help manage its £86.91 billion ($110.72 billion) in regional assets (as of June-end 2018). Lena Teoh joined in January 2017 as Singapore CIO; Benjamin Rudd was hired as Hong Kong country CIO the following month; Esther Ong was tapped to be Malaysia CIO in August 2017; Novi Imelda was hired for Indonesia in February 2018; and most recently, in November, PCA raided rival FWD for Will Chen to head up Taiwan investing.
“We have hired CIOs with diverse backgrounds and all have selected specific experiences, either in managing liabilities or in managing high-net-worth individuals,” van Vliet said. “We need small, experienced teams.”
He added that the company has now filled its main country CIO roles but that further investment team hires would likely take place on a periodical basis, including specialists in alternatives investing.
ADDING ALTERNATIVES
As with most insurers, PCA invests over 80% of its assets into fixed income instruments because they offer predictable returns over a defined period. However, lingering low interest rates in many markets have led PCA, like its peers, to focus on how best to diversify and improve returns.
The insurer does not divulge information on its asset breakdown or investment returns, but it is increasingly looking to alternative asset classes.
“I’d like us to add different diversifying asset classes to our portfolios,” van Vliet said. “The more we can add and manage in a prudent way, the better it is for our portfolios.”
This isn’t a new step for Prudential as a group; van Vliet pointed to Prudential’s for-profit insurance fund in the UK, which has benefited by adding private assets into its investments, along with a tactical asset allocation component. He noted that PCA has a global real estate portfolio that is “diversified through 2,000 assets through 20 funds”.
The insurer is now looking to build similar capabilities in private equity and private credit. “We will build these up but it will take some time,” van Vliet said.
As with most private asset investments, the key difficulty is with sourcing the right general partners to invest with. “They can only be top quartile [performers],” noted van Vliet.
He declined to estimate how much of its assets PCA would seek to invest into alternatives but indicated that it made sense to allocate at least 5% into such asset classes. The UK operations of Prudential already boast high levels of alternatives.
“We [PCA] are not there yet but we have significant allocations to private equity, real estate, private credit and want to do infrastructure but that is taking longer,” he said.
PRIVATE CREDIT OPPORTUNITY
A key asset class of interest is private credit. Van Vliet noted that PCA’s wholly owned subsidiary Eastspring has established an Asian private credit portfolio, while the insurer parent has also worked with fund manager experts in the US and Europe. This includes securitised debt instruments, which have long been out of favour because of the central role they played in the 2008 global financial crisis.
“On the senior side it’s interesting to see if we can do collateralised bonds; there are many pools of leasing or mortgage bonds [in those markets],” van Vliet said. “Of course there is some stigma to asset-backed securities, but why wouldn’t you take collateral if you can?”
Securitisation volumes in Asia itself are relatively low, but van Vliet believes insurers can play a role in supporting regulators and local banks in encouraging more such transactions.
Some investors have told AsianInvestor that banks in Asia are, unlike counterparts in other regions, pretty liquid and thus under less pressure to spin assets into special purpose vehicles. But van Vliet said some may wish to do so, to free up longer-term liquidity. He added that Prudential is working on investing into one upcoming deal.
There are other possibilities too. “Most aircraft financing is done in US dollars in China; why is not more done in Vietnamese dong or Malaysian ringgit in co-investment structure?” remarked van Vliet. “Specialised financing entities can supply the collateral and we can strike a cooperation [agreement] with them or invest via public bonds.”
Plus, PCA is looking at new infrastructure opportunities. “We are building up our experience in the infrastructure space and have partnerships" with multilateral development banks, lenders and other asset owners, van Vliet noted. He argued that such understanding is important.
Private equity, and in particular venture capital, marks another area of potential investment. “We will have a strategic portfolio of VC investments at a corporate level in companies,” van Vliet said.
LOOKING TO ESG
Aside from new asset classes, van Vliet and his team have focused on increasingly embracing ESG considerations.
Eastspring signed up to the Principles of Responsible Investment in February 2018, committing to taking ESG seriously across its investment products. PCA hasn't yet decided to sign up as an asset owner, but it's beginning to focus more on it across the group.
"We are incorporating ESG factors into investment decisions, manager selection and the manager-reporting process, in line with our commitment to responsible investing," van Vliet said.
That marks an interesting step for the insurer; most Asia-based life insurance companies have been noncommittal about their willingness to adopt ESG considerations in either insurance policies or investment strategies.
Van Vliet admitted that “perhaps insurance companies are more conservative [than other asset owners],” but he added that “once we adopt ESG we do so throughout the firm”.
“We are ahead of our peer group in Asia when it comes to adding ESG criteria when selecting asset managers and reviewing our processes,” he claimed. “We wanted to do this because we feel it gives us important information, in particular on the governance side of companies.”
He said this would include insisting that all the external asset managers it employs demonstrate they have fully embedded ESG assessment processes in their investment decision-making. PCA is likely to pursue ESG integration approaches, rather than have the fund houses screen out certain industries.
For further insight and analysis into how Asian insurers are seeking to invest and navigate regulatory changes, look out for AsianInvestor's 6th Insurance Investment Forum in Hong Kong on March 12, and our inaugural Insurance Investment Forum in Singapore, on March 14.