Fund focus: Secondaries drive Ping An unit’s transition

China Ping An Insurance has operated overseas investment platforms out of Hong Kong for more than 20 years, channeling a portion of the company’s RMB3.44 trillion ($515 billion) investment portfolio into a variety of assets held outside of China. China Ping An Insurance Overseas Holdings (PAOH) is part of these efforts, having spent years building up exposure to global alternatives.

The next stage in PAOH’s evolution will see it transition into a manager of third-party money. At present, a minority of the firm's assets under management (AUM) come from external clients. Hoi Tung, the division’s chairman and CEO who was transferred from Ping An in 2016 to lead this effort, is targeting a significant increase in assets to $100 billion within five years. Most of these will be sourced from third-party investors.

Spinning out part of the PAOH private equity portfolio via a secondary transaction is part of this transition. The unit has several billion dollars in PE exposure, of which $875 million has now been moved off the balance sheet. GIC Private, Switzerland-based secondaries investor Montana Capital Partners, and a third unnamed investor are backing a new structure that comprises a fund-of-funds and a co-investment vehicle. PAOH has a minority interest and will continue to manage the portfolio.

“It is a gradual step for us to get into third-party asset management,” says Nicholas Ng, a managing director for private equity at PAOH. “It’s tough getting started. People want to see a decade-long track record before they come in, so we used the balance sheet to build a portfolio. This transaction gives investors a sense of our investment logic and our ability to access quality opportunities. We want them to give us the authority, liberty and trust to manage some dry powder.”

Picking partners

It is not the firm’s first transaction of this nature. Last year, PAOH tapped third-party investors for $758 million as it created a set of global infrastructure funds, with Ardian participating as the anchor LP. The portfolios were seeded with fund commitments and co-investments from the Ping An balance sheet. There is also dry powder for new investments.

PAOH decided against appointing an agent for the private equity deal. Ng observes there is sometimes a stigma attached to GP-led secondary transactions and so the process was run in-house. Montana had an edge for two reasons. First, Marco Wulff, the firm’s managing partner, is a longstanding acquaintance of Ng (they both attended the London School of Economics, albeit some years apart).

Second, Montana has previous experience in this area. “We’ve done it a few times in Europe, though more with direct investment funds owned by banks or insurance companies,” Wulff says. “They wanted to reduce their exposure to private equity and to help the team build a track record. It has generally worked well, with teams going on to raise third-party funds and becoming independent.”

Ng adds that putting together a secondary deal under market conditions characterized by volatility and macroeconomic uncertainty is not easy. Montana demonstrated a lot of conviction in the PAOH team and were comfortable enough to loop in GIC.

“We talked to a handful of other people. Some of them pay a lot of attention to fluctuations in quarter-on-quarter valuations, but Montana saw through the cycle, and said this is a good underlying portfolio and we trust that PAOH can be a long-term partner,” Ng adds. “They wanted to build a deeper relationship that went beyond this transaction.”

The fund-of-funds – which accounts for about 80% of the capital committed – is fully populated by positions in North American and European funds. The co-investment vehicle is only partly seeded, with dry powder set aside for new investments. Most of these will come from managers within the fund-of-funds portfolio, but PAOH expects to draw on opportunities from across its GP relationships.

Further secondary transactions involving the remainder of PAOH’s global private equity portfolio have not been ruled out – there is a recognition that the seeded assets-to-dry powder ratio may fall with each new fund – but the next priority is “productizing” balance sheet assets in China. PAOH’s investments in its home market are US dollar-denominated and direct; Ping An’s onshore asset management platform handles renminbi deals.

The portfolio includes a $150 million investment in GDS Holdings, China’s largest data center operator, made in May 2019. Since then, the US-listed company’s stock has gained more than 140%. PAOH has also secured two exits in the past year, including Huya, a gaming-centric live-streaming platform that recently merged with industry peer Douyu.

A domestic focus?

When PAOH embarked on its new strategy four years ago, the plan was to maintain a balance between China and overseas exposure, but the firm is gravitating towards the former. Ng points to the changing demographics, emerging technologies, and evolving consumption patterns as reasons to be bullish on China, but there are also structural impediments to participating more fully in international markets.

“PAOH will continue to pursue fund investments and the Ping An balance sheet will do that as well,” says Ng. “The insurance business is 100% onshore and so overseas investments are subject to a lot of regulatory scrutiny and restrictions. I can’t put a number on how much Ping An will invest in overseas LP interests. Sooner or later, I think it will open up, but I don’t know when.”

These dynamics are likely to impact PAOH’s future direction as an asset manager as well. The firm may continue to serve as an offshore investment channel for Ping An, but this doesn’t preclude building up a robust third-party business. Ng notes there are examples in Europe of asset managers gradually separating from their parent groups while retaining those groups as significant LPs.

It remains to be seen where the money comes from and what that means for how the firm defines itself within the international asset management community. Is PAOH a trusted local brand that helps a broad swathe of Chinese investors build up exposure to alternatives overseas or does it serve as a conduit for global institutions that want to access China?

“What we thought we would do at the beginning is be a bridge between East and West,” Ng explains. “The amount Chinese people can invest overseas is heavily constrained, so we are more opportunistic right now. However, having Montana and GIC backing us is a strong signal of our ability to serve the global investment community.”

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• Topics
• Greater China
• Secondaries
• Fund-of-funds
• China
• Ping An
• Montana Capital Partners
• Secondaries