LP interview: Manulife Investment Management

Canadian insurance giant Manulife has been active in Hong Kong since the 1890s, but its asset management division didn’t establish an office in the city until 2000. And it was only last year that Manulife Investment Management made a concerted push into Asian private markets with the appointment of Myron Zhu as the Hong Kong-based head of that agenda.

The awakening is not a one-off. Global insurers like AIG and AXA have been spurred into exploring Asian alternatives in recent years as competitive pressure mounts among them and regional macro enticements inspire diversification. There has been scattered traction on this front, but no winning formula has yet come to light. Often, this is due to mission pivots at the parent company level, with the relevant expansion team getting sold or spun out.

“From that perspective, we’re going into unchartered waters, trying to figure out and develop a business model which I hope will align the interests of all parties and make it much more sustainable,” says Zhu, who served as co-head of private equity at Aberdeen Standard Investments for four years until June 2019. “I’m not trying to mimic what anyone has done because there’s no really successful model for me to refer to at this moment.”

Manulife has C$713 billion ($536 billion) in assets under management globally, 7% of which is in private markets, including mortgages, power and infrastructure, mezzanine debt, private placements, real estate, timber, agriculture, and private equity. Asia represents less than 10% of the private markets allocation, compared to an average of 15% among the firm’s global peers.

Still, Asia accounts for 34% of Manulife’s overall insurance business and it’s the firm’s fastest-growing market in both insurance and asset management. In recent years, the region has been recognized internally as the starting point for in-house innovations that go on to be rolled out globally. This profile is greasing the wheels for Zhu’s mandate to build out private markets capacity, but the flexibility has practical limits.

“People may think that on a large platform, you have a lot of resources ready at your disposal and it should be easy to build a business,” says Zhu. “But if you peel the onion a little bit, you see you need to focus on the relevance of the resources and whether that knowledge set extends to private markets. Sometimes that is not as straightforward as you think it is.”

Growth drivers

These are the challenges around the plan for organic growth, which would see Manulife’s Asian talent – historically focused on public assets and managing balance sheet capital – move increasingly into illiquids and third-party capital. This migration could be supported by the seeding of new portfolios with existing assets, as was achieved last month with the firm’s debut global fund-of-funds. Manulife Private Equity Partners (MPEP) closed at $1.5 billion after being seeded by prior interests in North American buyout and growth funds.

Further growth is set to come from partnerships with other large entities and the acquisition of controlling stakes in proven GPs. These transactions will be pursued with an open mind to investment strategy, but the target markets need to have enough scope to scale a multi-billion-dollar business in the next few years. Many small, mid-sized, and niche GPs – which may be among the most eager to participate due to struggles around an LP flight to quality – could therefore be off the menu. 

This is not the only way that Manulife’s sheer size is creating obstacles for its Asian alternatives vision. Large, process-driven organizations with tight risk management are often in danger of overburdening more nimble investment teams with bureaucracy. The trick to avoiding an insurmountable culture clash will be in leveraging the best of both universes, encouraging entrepreneurship with a modest amount of institutional oversight.

“The private markets capability that we’re trying to build as well as the inorganic growth we might be targeting to acquire – these tend to be hungry teams driven by members who are eager for success,” says Zhu. “I have to avoid the big mothership overshadowing the entrepreneurship of the start-up and burying it under unnecessary corporate processes and an approvals maze. That could kill the business before it gets started.”

Zhu is one of about dozen team members in Asia focused on private markets and the only one working exclusively in third-party capital. However, that capacity could balloon to around 100 dedicated investment professionals in as little as five years. “I wouldn’t be surprised if we had 3-4 strategic launches in the next three years,” Zhu says. “Each strategy might have a team of 10-20 people, and in five years, we may have 5-6 strategies in the market at the same time.”

Immediate priorities

For the near term, core strategies will be cash-yielding, including private credit, real estate, and infrastructure, which Zhu sees as offering a better risk-adjusted return versus private equity. This highlights the discrepancies between Manulife’s Asian private markets “start-up” and its more aggressive global institution.

In addition to MPEP, which is expected to focus largely on North American middle-market managers, Manulife’s recent private market forays at the global level include the launch last year of a secondaries business focused on GP-led and special situation transactions. That strategy is expected to come to Asia eventually, but not before the Hong Kong office completes a teething period at the more conservative ends of the alternatives space.

“Private equity plays a pivotal role, but given that we’re seeing record dry powder, especially at the larger end of the market, my expectation is that the average return for private equity will likely be 200-300 basis points lower for the vintages going forward compared to what we’ve had prior, purely driven by supply and demand,” says Zhu. “The higher price a private equity deal gets compared to historical numbers, inevitably it will drive down returns.”

Zhu’s immediate background at Aberdeen and industry expectations around company valuation corrections suggest that private equity will be a focus in the future, although this may involve a relative emphasis on direct investments versus fund commitments. For now, however, it’s open season to experiment with allocations in more foundational silos.

“Even if I put a $200 million in each strategy, it wouldn’t move the needle from a global asset allocation perspective, so I don’t have this constraint at the moment,” Zhu explains. “It’s really just opportunistic which strategies will be [prioritized], and then we’ll try to grow every single one of them.”

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• Topics
• Greater China
• LPs
• Credit
• Infrastructure
• Real estate
• Hong Kong (China)
• Manulife