LP interview: Natixis

Natixis Investment Managers, the investment subsidiary of French banking giant Natixis Group, ranks among the world's largest asset managers with $1 trillion in assets under management (AUM), about 15% of which is allocated to alternatives. Asia and private equity have traditionally played bit roles in this story, with crossover between the two even more negligible. That's changing rapidly. 

In the past few months, Asian activity has accelerated, with two portfolio fund managers opening offices in the region for the first time. London-based H2O Asset Management, a hedge fund specialist with $32.5 billion in AUM, has set up shop in Singapore, while Paris-based Ostrum Asset Management, a $294 billion private debt provider for real estate and infrastructure projects, is now operating out of Hong Kong. 

The firm's private equity agenda has also come into sharper focus, with three affiliates merged into a reenergized entity. Flexstone Partners has brought together Singapore-based fund-of-funds Eagle Asia Partners, Switzerland's Euro Private Equity and US co-investment fund manager Caspian Private Equity under one roof with $6.7 billion in combined assets and more than 40 PE professionals. Spiking demand from institutional investors in Asia Pacific was no small part of the calculations behind the tie-up.  

"Private equity was not a high priority for us five years ago, but we are seeing such fast-growing demand for the asset class from clients that we decided to completely reorganize our PE operations," explains Fabrice Chemouny, head of Asia Pacific for Natixis Investment Managers. "When we did that, we saw that many fund positions were already taken by the largest players, and we wanted to avoid competing with them. This is a winner-take-all industry, so we want very niche positioning. Today, our focus is on small and mid-tier managers, but we will grow to a higher level."

Natixis is pursuing these ambitions through a unique multi-affiliate structure whereby the firm has taken majority stakes in 27 portfolio fund managers specialized in various strategies and geographies. In addition to Flexstone, H2O, and Ostrum, affiliates active in Asia include AEW ($25 billion in real estate), Loomis Sayles & Company ($234 billion, partially in hedge funds) and sustainable investment specialist Mirova. The latter closed its second fund at about $1 billion last year with support from life insurance and pension investors from Korea and Japan. 

Private equity activity in the region is expected to be led by Flexstone, but other portfolio GPs have recently entered the mix as well. These include two French outfits: Seventure Partners, which focuses on life sciences and is starting to explore Southeast Asian partnerships; and Naxicap Partners, a buyout shop for small to medium-sized enterprises in Europe that is fielding interest around Asia ahead of the launch of its second fund later this year. Within Flexstone, Euro Private Equity is finalizing the close of its second fund and contemplating the launch of a third during an Asian road show this summer. 

"Last year, 36% of our growth in Asia Pacific was driven by alternatives because we have been in a very uncertain market, where volatility is high and interest rates are low," says Chemouny. "Our clients are looking for diversification, especially life insurance companies that face regulatory issues and pension plans that used to invest a lot in fixed income but now need better returns. These institutions are happy to invest with us in Asia because we can give them access to a global distribution platform."

Institutional outreach

Tapping Asian demand for diversified global strategies, investing in Asia-focused managers and bringing global managers closer to Asian markets are the key tenets to Natixis' plan to grow total AUM for Asia Pacific to about $200 million by 2020. It was about $100 million in 2017. 

But these machinations are also an exercise in acquiring new capabilities, enlarging the menu of sweeteners that can be offered to potential Asian partners, and improving capacity to grow in the region by more efficient means. Historically, Asian traction could mostly be described as organic growth, with the firm's regional footprint matching a sequenced proliferation in office openings. It now has bases in Tokyo, Seoul, Beijing, Taipei, Singapore, Sydney, and Hong Kong. The tighter focus on alternatives and private equity, however, appears to have introduced a more nuanced phase of expansion.  

Recent cases in point include the swapping of a 13-year relationship with Taiwan's Fubon Asset Management last year for a more alternatives-focused partnership with local financial services provider CTBC Investments. Meanwhile, the firm has signed an agreement with Japan's Asahi Life, which will invest about JPY80 billion ($725 million) in Natixis alternatives products including aircraft and infrastructure debt, as well as Flexstone private equity funds. Furthermore, an investment program was launched in March alongside Australian super fund Hostplus, a longtime partner, that will invest middle-market PE managers in the US.

"We intend to take our private equity capabilities in Asia Pacific to the next level by growing both organically and through acquisition, as well as by expanding our product mix," says Chemouny. "We're now giving our clients access to far more varied expertise and more privileged access to investment strategy on the alternatives side, whether that's in private debt, liquids or illiquids. We'll do everything possible to grow in Asia through these angles. It's a key market for us and helping partners with global access is our key on that front."

Increased appetite for co-investment has added another dimension to this effort by leveraging Natixis' core value-proposition of internationalization; the firm has a presence in 35 countries. Early experiments with direct investment sidecar vehicles in infrastructure programs have now filtered into private equity. Currently, Natixis is negotiating co-investment terms on a European infrastructure project with an Asian life insurance company that is putting EUR100 million ($111 million) directly into the portfolio manager's fund and at least EUR200 million into the sidecar. 

Other tools in the shed include the newly established Natixis Investment Institute, which provides market trend analysis and forecasting to clients based on five years' worth of portfolio surveys, as well as a headcount of 800 employees in Asia Pacific (out of some 18,500 globally). Last month, Ostrum appointed Charles Regan, a managing director at Windward Capital Asia, as head of infrastructure and real asset private debt. Ostrum said that Asia would account for 60% of global infrastructure spending by 2025, thanks largely to China's One Belt One Road agenda. 

A China proposition

Still, breaking into China remains the last essential coup yet to be realized. Natixis has engaged with at least 70 asset managers in the country with a view to buying into the manager as an affiliate and satisfying a growing chorus of institutional partners that insist on access to the market. Precedent for such a move in an Asia Pacific context was demonstrated in 2017 with the acquisition of Australia's Investors Mutual, or IML. Although this method of entry has proven slow, it is expected to bear long-term fruit in the form of more integral operational exposure. 

"Everybody talks about China, but it's very difficult to be successful here. At a high level, a lot of investors have Chinese joint ventures, but I don't believe those JVs have been very successful," says Chemouny. "That's because there are not a lot of synergies between the foreigners and the Chinese entities. We've looked into different ways to expand into the market, including WFOEs [wholly foreign-owned enterprises] but decided that the only way it would really work is through acquisition. That fits with our DNA because we need to play with what we know, and for the last three decades, we've grown through acquisitions."

Natixis' targeting in China has therefore focused on active managers with conspicuous potential for exploiting synergies – inbound or outbound – with the global network. This priority recognizes the extended timeframes of the affiliate structure of the Natixis portfolio as well as the fact that access difficulties around China are a two-way street. Not only have foreigners struggled to get in – but locals have struggled to reach out. 

"A lot of asset managers in China are trying to develop outside of the country but it's not easy for them to go abroad," says Chemouny. "We can provide them with international access, but for us, it has to be long term, because we're not a private equity firm. We call these managers our affiliates, not our subsidiaries, and that means a lot. Trust should be there, and we should help them grow. This is especially critical to our strategy in Asia because China is a complicated market but it's the second largest in the world."

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• Topics
• LPs
• Europe
• Greater China
• Infrastructure
• Flexstone Partners
• China
• Asia
• Fund-of-funds
• Co-investment