Taiwan LPs: Increased exposure

The single percentage point increase in permitted allocations to private equity and hedge funds recently awarded to Taiwan’s insurance industry might seem relatively significant but it is the product of years of patient lobbying. It is hoped that the move from 2% to 3% proves to be one step in a process that ultimately turns the territory into a meaningful fundraising destination. Though the goal is likely years away, there is already some excitement about what the latest reform will bring.

“This new regulation could free up as much as $10 billion of capital for investment in alternative assets, based on calculations of insurance companies’ current assets under management (AUM),” says Andy Tsai, a partner at StepStone Group. “But this number could still be considered a conservative estimate, because the AUM has been growing steadily every year.”

For international GPs, there is the prospect of receiving larger commitments from an LP base that is said to write checks in the $20-50 million range. Some Asian private equity firms might set their sights lower given they previously haven’t been able to access Taiwan insurersat all. 

Insurers have thus far been restricted to investing in funds raised by GPs registered in member nations of the Organization of Economic Co-operation & Development (OECD). This excluded most jurisdictions in the region apart from Australia, Japan, and South Korea. Under the new rule, a firm registered in any of the 121 countries and regions that have signed up to the international benchmark on cross-border cooperation, which include China, India and Vietnam. A sovereign debt rating of A+ or above is also required.

Tsai observes that most insurers make allocations based on geography and this opening up of the system could see more investment in Asian markets. Other industry participants, however, are wary of overhyping the changes, noting that the local LP community is small and qualification for the increase in allocation is contingent on groups having at least 40% of their total assets deployed overseas. 

“The rule change is a welcome move and it could result in GPs paying more attention to the island,” says Vincent Ng, a partner with Atlantic-Pacific Capital, a placement agent. “But at the end of the day, Taiwan’s LPs are still relatively few in number.”

More to deploy

Taiwan has the highest insurance penetration in the world, which contributed to premium income reaching a record high of $122.8 billion in 2017. Insurance companies are estimated to have around NT$24 trillion ($777.9 billion) in investable assets, although partly due to the 2% cap on private equity and hedge fund exposure, around 68% has flowed into areas such as infrastructure and real estate in the US, Canada and Western Europe, according to government data. Meanwhile, the allocation for bonds and public market securities is 18.75%.

Six or seven groups are looking at opportunities in the alternatives space. They include three of the four largest domestic insurers, Cathay Life Insurance, Fubon Life Insurance and Nanshan Life Insurance, which between them have more than $400 billion in assets. All three can take advantage of the 2% to 3% increase, based on the level of their overseas investments.

This reform is widely seen as an olive branch handed by the authorities to the insurance industry. The government’s discomfort about the risk involved in private equity is long-held and well-known – perhaps best illustrated by the blocking of KKR’s proposed $1.6 billion privatization of Yageo Corp. in 2011, where it cited concerns about shareholder and investor protections. 

However, the combination of a low interest environment, a rapidly aging population, and increasingly fierce mainland competition, as well as concerted lobbying, has forced the government’s hand. Insurance companies need access to assets that entail higher levels of risk because the superior returns are required to cover liabilities. 

The Financial Supervisory Commission (FSC) said in a memo explaining the change that it was driven by the growth in the alternative asset market globally and an appreciation of the role such products can be play in global institutional investors’ portfolios. 

Brand names benefit

As for the GPs that stand to benefit the most from increased allocations, the answer seems fairly simple. For decades, Taiwanese insurers have opted for relatively low risk assets because their business model prioritizes long-term stability. They are likely to stick with what they know – brand names in developed markets. 

“We must consider downside protection in all our investments. So, we will look at a GP’s track record before assessing the target return. Going forward, we will focus on investing in buyout funds in mature markets,” says a senior executive with a top four insurer. “This does not mean we would rule out the possibility of investing with private equity firms that offer products with higher risk, but it wouldn’t happen in at least the next two years.”

Moreover, even given license to explore private equity and hedge funds more deeply, these groups will retain their strong focus on infrastructure, real estate and private debt.  

“They don’t chase the highest returns, which is very much in keeping with the conservative character and the long-term nature of life insurance,” says Melanie Nan, a managing director at CDIB Capital, the private equity arm of China Development Financial, who classifies brand-name buyout funds as safe bets alongside infrastructure and private debt. “Insurers generally aren’t keen on VC, but a select few would be interested in specific industries and place capital in earlier stage companies in these areas.”

While the increase is regarding within the insurance industry as a battle won, there is still a keen interest in pushing for further reforms. In addition to raising the cap even higher, the bans on co-investment alongside portfolio GPs and direct investment in private companies could ultimately be lifted. It will be the focus of more lobbying efforts, but not with the expectation of immediate success.

“It is a pity Taiwanese insurers are unable to share the fruits of co-investment opportunities, which are usually carefully selected by GPs and therefore of good quality,” says another leading insurance executive. “We hope the government will relax the rules in this regard because we have a responsibility to create a better ecosystem in Taiwan. Changes in the alternatives space are supposed to help us achieve that.”   

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• Topics
• Greater China
• LPs
• Regulation
• Taiwan (China)
• Stepstone
• CDIB Capital
• insurance