APAC insurers are planning to significantly increase private market and hedge fund holdings, from 20 per cent to 33 per cent of portfolios within five years but face significant operational challenges that could determine competitive winners and losers, new research from Clearwater Analytics (NYSE: CWAN) shows.
The study of insurance asset management executives at firms with total assets under management of USD3.823 trillion found that currently they manage an average of 20 per cent of insurance-focused assets in private markets.
Within five years, this percentage in private markets is forecast to rise to 33 per cent, the study of insurance asset managers in Hong Kong, Singapore, and Australia found.
However, executives working for the asset management arms of life, health, and general insurers as well as third-party investment managers supporting life insurance carriers cite operational concerns about investing in private markets.
Adding urgency to these operational challenges, 96 per cent of executives expect increased M&A activity over the next three years, suggesting firms with superior capabilities will have competitive advantages in a consolidating market.
Two of every five executives (41 per cent) say there are increased complications from a legal and compliance perspective from investing in private markets while 29 per cent say viewing private market assets alongside traditional assets is challenging.
Nine in 10 (91 per cent) say their technology systems are very or quite effective at processing new asset classes while 92 per cent say it is very easy or quite easy to determine fair value for private markets assets.
A key driver for the switch to private markets is increased diversification, with 88 per cent expecting diversification to increase over the next three years. Third-party managers have the strongest expectations for diversification, with 30 per cent saying it would increase dramatically, compared to 10 per cent of life/health insurers and just 4 per cent of general insurers.
An overwhelming majority (93 per cent) agree that the most attractive investment opportunities for investors currently are in the private markets and not the public markets, with 37 per cent strongly agreeing with that view.
“APAC insurers are firmly convinced how attractive investing in private markets, which have produced consistently attractive returns for their portfolios,” says Shane Akeroyd, Chief Strategy Officer and President of Asia Pacific at Clearwater Analytics.
“That is reflected in the forecasts about rising allocations to private markets and the recognition that many of the most attractive investments are in that sector. However, operational concerns have to be addressed by insurers.
“Legal and compliance concerns are seen as the biggest issue, but insurers also need to assess private markets alongside traditional assets and require technology and platforms to support them.”
