LP interview: MetLife Investment Management

An insurer’s asset allocation strategy is ultimately dictated by the nature and location of its liabilities. MetLife consequently has a heavy bias towards the US, which was the source of more than 60% of its premiums last year. However, with Japan well-established as the firm’s second-largest market and an emerging business in China, there is growing demand for local currency exposure in the region.

MetLife Investment Management (MetLife IM), which serves MetLife and other institutional investors, has USD 648.5bn under management. The private equity programme is just over USD 20bn, including unfunded commitments, and Asia is just under its target allocation of 10%.

There is a relatively concentrated portfolio of approximately 15 manager relationships in the region. This includes a handful of local currency fund commitments made by the Japan team on the back of regulatory reforms encouraging greater participation by insurers in private equity.

More recently - and excluded from the core group of 15 relationships and the 10% allocation - a dedicated China operation has started to do the same. These on-the-ground resources have proved valuable.

“There is regular contact in terms of exchanging views on the market,” said Nick Milnes (pictured), head of Asian private equity at MetLife IM, regarding the three-person team in Shanghai, which was established last summer. “Having people who can assist on the China side has been especially important given the difficulties travelling into China.”

Milnes has been with the firm since 2019, having previously worked for Schroders Capital – now Schroder Adveq – in Zurich and Beijing and then co-founded and run Integrity Capital Partners, a China-Europe cross-border private equity firm. He leads underwriting for all Asia investments apart from the renminbi-denominated balance sheet for which decision-making must be carried out locally.

MetLife IM started investing in private equity in the mid-1980s and entered Asia in the mid-1990s. Co-investment was introduced a couple of years ago and the firm is taking a cautious approach, at present only participating in deals offered by portfolio GPs in the US and Europe. Approximately half of the Asia book is deployed with pan-regional manages and the rest in single-country funds.

As a member of the global investment committee, Milnes has seen many managers return to market multiple times in the past three years – a result of rapid deployment and product proliferation. “No Asian GP has come back twice in that time, but deployment has been faster than expected,” he said.

The global private equity boom left MetLife’s portfolio somewhat imbalanced, prompting the execution of a managed secondary transaction earlier this year that moved assets from the insurer’s balance sheet to a new fund-of-funds managed by MetLife IM. A consortium led by HarbourVest Partners acquired existing positions worth USD 1.2bn and contributed USD 400m in primary capital.

Approximately USD 175bn of MetLife IM’s assets constitute capital managed on behalf of institutions – primarily corporates, insurers, and other financial services companies – with no ties to its parent. The recent secondary transaction marks the launch of this third-party asset management business in private equity, which previously wasn’t represented.

Major markets

On a geographic basis, Japan represents MetLife IM’s largest exposure in Asia, given the size of the local balance sheet, with China not far behind. The general objective is to maintain a balance between the region’s developed (Japan and Australia) and emerging (China, India, and Southeast Asia) markets. Adding a new relationship to the core portfolio usually means ending an existing one.

“We prefer more control-oriented GPs, and we are cautious when it comes to passive, momentum-driven strategies. For that reason, we’ve tended to be more overweight developed markets, like Japan and Australia, where GPs have more exit options and consequently we get more reliable distributions,” said Milnes.

“In developed markets, GPs might be able to return money back a bit quicker, so it looks better in terms of IRR, whereas emerging markets GPs might do better in terms of multiple. On a blended basis, however, I wouldn’t say that one country outperforms another within our portfolio.”

Cheque sizes in Asia range from USD 30m to USD 100m. Most funds are USD 1bn and above, although exceptions are made in Japan and Australia where MetLife IM has identified plenty of institutionally minded, buyout-oriented GPs looking to raise USD 500m to USD 1bn.

That preference for control strategies has left the firm underweight on China. There are no plans to change this allocation, even though some country managers are looking to pursue pure buyout strategies or at least make hybrid strategies more biased towards control transactions. Rather, sector exposure is a more pressing issue.

“Our GPs tend to be more generalist and we’ve shied away from single-sector focused managers,” said Milnes. “Given what’s happened on the regulatory side, that’s something we are happy to maintain. Having the ability to be flexible in the current environment is a benefit. If a GP is pigeonholed into a particular sector and something happens, it’s difficult to pivot and resolve those issues.”

MetLife IM hasn’t refused a re-up in China, but the slower pace of fundraising industry-wide is plain to see. Milnes notes that local managers, seemingly aware of the difficulties some LPs encounter getting investment committee approval for China commitments, have become less aggressive in their deployment to avoid coming back to market too soon.

“We have seen a reduction in capital calls from some of our Chinese GPs, just because capital seems to be a bit more valuable in that market right now,” he added. “Often, the best returns from GPs come during periods when it is difficult to raise money, so it’s not necessarily a bad thing.”

Meanwhile, a split in strategy has been detected between US dollar and renminbi funds. For now, MetLife IM is backing local currency vehicles raised by managers with overseas pedigree, reasoning that it makes sense to have overlap between the US dollar and renminbi portfolios. The former are concentrating on less sensitive sectors; the latter are big on deep-tech and semiconductors.

Deploying a larger portion of the Japan balance sheet in private equity is in keeping with a general push into alternatives by local LPs. With few additions to an already relatively small pool of investable GPs, this creates a supply-demand imbalance. MetLife IM must compete for space in funds that are raised quickly and hit their hard caps, resulting in a scaling back in allocations.

Some managers have seized upon the opportunity to increase fund sizes substantially, causing the middle market to splinter into multiple tiers. MetLife IM has stayed away from that cohort, maintaining its focus on the JPY 80bn-JPY 120bn (USD 580m-USD 870m) space.

“They might have increased as well, but the track record is applicable, and we can see that, with co-investment and more deals per fund, ticket sizes are consistent with what they’ve done in the past,” said Milnes. “If you dig into the details, the scale-up isn’t always as extreme as it may appear at first glance.”

Diligence points

Minimum cheque size requirements outside Japan and Australia limit the firm’s ability to dip into the middle market in certain geographies – for example, few India managers and no single-country Southeast Asia managers would meet the criteria.

MetLife IM has a global emerging manager programme that backs younger GPs looking to raise less than USD 300m. However, there is a diversity and inclusion (D&I) filter, intended to help nurture a generation of female or minority-led GPs that can eventually graduate to the core portfolio. The sole Asian investment to date is in a female-led venture capital manager focused on financial technology.

Milnes leads environment, social, and governance (ESG) oversight within the firm’s 12-strong private equity team. Much work has gone into strengthening due diligence processes, often relying on third-party resources so there is no need for dedicated in-house personnel. A sustainable investment team that works across asset classes can be called upon if specific expertise is required.

MetLife IM has declined to make fund commitments based on ESG, typically for governance reasons. Working with established GPs with institutional set-ups and developed back and mid-office functions, clear red-flag events are relatively infrequent. It tends to be more judgment calls on whether a team looks unstable or there is succession risk.

Succession and assorted contributing factors – such as the distribution of carried interest throughout teams and how it has evolved over time, as well as how junior partners buy into the management entity and senior partners are phased out – always plays a key role in due diligence.

“There have been situations where we didn’t invest or stopped investing because we felt that wasn’t going in the right direction,” said Milnes. “A lot depends on geography. In some places, there is more of a track record or precedent for how to go about it. In others, like China, the GPs are younger, and we haven’t seen as many cases of the second or third generation taking over.”

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• Topics
• LPs
• Fundraising
• MetLife Investment Management
• Asia
• insurance