Fresh from launching its private credit business for Asia, Allianz is looking to focus on the Indian market, said Allianz Investment Management CEO and Asia chief investment officer Ritu Arora.
Besides India, other markets including Indonesia and Thailand “could become more interesting”, said Arora, noting that these markets have their own set of challenges as well.
“The growth of the Indian economy, which is likely to continue because of fundamental trends like positive demographics, triggers significant financing needs for the real economy. A challenge for private credit in India has been the regulatory environment and the difficulties of ensuring creditor rights in a timely matter.
“With the new insolvency and bankruptcy (IBC) code, this is now moving in the right direction. The framework is solid and now needs to be tested in practice. The first data points from ongoing cases look promising to us, but it is still too early to tell and the real test will come when many mid-sized companies hit the proceedings,” she told DEALSTREETASIA in an email interaction.
Last November, the German insurer’s investment arm roped in former executives at private equity firm Abraaj Group, Sumit Bandhari and Weizhong Yun, for its Singapore-based pan-Asian private credit team.
While some investors are concerned about the increasing global dry powder in private equity, Arora said there is nothing to be alarmed about, as deal volume continues to increase globally – a reflection of the continuing interest by investors in the asset class, in particular relative to other investment opportunities.
“This is no different in Asia, where the current dry powder probably represents 2.5 to 3.5 years of deal volume. The private equity market opportunity set continues to grow in Asia as a result of the continued maturity of the respective PE markets particularly in large emerging markets such as China, India and Southeast Asia.
“Succession issues, challenges of growth or international competition and expansion, as well as the wider acceptance of private equity are contributors,” she said.
Although Southeast Asian private equity market is expected to be smaller than both China and India as it is less mature and more fragmented, Arora said, venture capital in Indonesia could develop faster than the overall private equity market, given its large, young, tech-savvy population.
Allianz Group, via its digital investment unit Allianz X, has invested $35 million into Indonesian ride-hailing major Go-Jek’s $1.5-billion funding round raised last year. The unicorn startup is said to be finalising a $2-billion funding round to boost its international expansion plans, Arora declined to comment.
On real estate, Arora said Allianz’s growing insurance business in Southeast Asian key markets including Thailand and Indonesia is opening up opportunities for its property arm to property investments in these same markets.
“Asia’s property markets kicked off 2019 with growing headwinds, with concerns over a global trade war, rising interest rates and increasing valuations. Our investments are aligned to underlying economic trends. Despite the headwinds, on a relative basis, we find Asia as an ideal destination for securing diversification as well as secular growth trends.
“Our focus in 2019 will continue to be on office and logistics sectors especially in fast growing markets like China, India and SEA. Real estate investments in retail, and developing markets like Australia and Japan will be selective and focused on generating stabilised yield,” she said.
How has the year been for Allianz? What do you look forward to and which are the sectors that you’re bullish on for 2019?
2018 has been a good year for Allianz. We have done well on operating metrics, growth, sustainability, industry leadership and innovation. Asia has been a key contributor in this success story. Allianz received approval for China’s first fully owned foreign insurance holding company. In 2018, Allianz was ranked 38th in the Fortune Global 500 list; and achieved the top position as sector leader among all rated insurance companies in the Dow Jones Sustainability Index (DJSI).
2019 looks likely to be another interesting year. We expect broad based growth to slow down moderately owing to the base effect of US tax cuts. Political risks continue to be high with trade war fears, Brexit, Italy and Mr Trump’s in general unconventional policies being in the limelight.
Asian economic growth is still on a solid footing with inflation being in control. A modest slowdown in the US forms a positive backdrop for Asia as it reduces the chances of rate hikes in the US. Further, the recent ~40 per cent correction in crude oil prices shall also lead to lower inflation pressures. These factors give breathing space for Asian economies most of which are at best in the mid cycle of growth.
Over the last few months several pockets of value have emerged as markets corrected. China A shares look oversold and present a good opportunity to invest. Similarly the correction in the Philippines and Indonesian equity markets have also thrown up interesting opportunities. Fixed income markets in Asia also provide a favourable risk-reward. Especially in markets like India, Indonesia and Philippines where real interest rates are at record highs.
How do you view the NBFC-led (non-banking financial company) liquidity crisis in India?
It is a classic case of asset liability mismatch, accentuated by a trust deficit in the system. The intervention by regulators and government have now resulted in a reprieve and good quality NBFCs have seen a stabilization in the operating environment. However, the problem has not completely been resolved. Those NBFCs running large ALM mismatches must utilise this reprieve and correct their ALM positions as soon as possible. Currently, we do not foresee a sharp drop in economic growth forecasts. The various reforms that have been initiated in recent years should be able to support growth in future years. In the short term, volatility might remain high. In the long-run, we expect India to continue its growth path.
Some investors are concerned that there is too much capital in Asia with too little deals to support the dry powder. Do you share that concern? How do you view the PE scene in Southeast Asia and Asia?
While dry powder in private equity is growing globally, this is a reflection of the continuing interest by investors in the asset class (in particular relative to other investment opportunities). At the same time, however, deal volume continues to increase globally. Seen in perspective, therefore, the growth in global dry powder in and of itself is nothing to be alarmed about. This is no different in Asia, where the current dry powder probably represents 2.5 to 3.5 years of deal volume.
The PE market opportunity set continues to grow in Asia as a result of the continued maturity of the respective PE markets particularly in large emerging markets such as China, India and SEA. Succession issues, challenges of growth/international competition and expansion, and the wider acceptance of PE are contributors.
What are your plans for GP co-investments in China?
Co-investments alongside our GPs continues to be part of our core strategy. While trade war and rising US interest rates are the two risks that we need to navigate, the recent correction has made certain investments more attractive.
A few firms have started to look into private credit in Asia. What is Allianz’ views on private credit in Asia and particularly Southeast Asia?
The structural opportunity for private credit also exists in Asian markets. For this reason Allianz has just established a pan-Asian private credit team out of Singapore that focuses on markets such as India and South East Asia. Particularly India is a focus market in private credit for Allianz: The growth of the Indian economy, which is likely to continue because of fundamental trends like positive demographics, triggers significant financing needs for the real economy.
A challenge for private credit in India has been the regulatory environment and the difficulties of ensuring creditor rights in a timely manner. With the new insolvency and bankruptcy (IBC) code, this is now moving in the right direction. The framework is solid and now needs to be tested in practice. The first data points from ongoing cases look promising to us, but it is still too early to tell and the real test will come when many mid-sized companies hit the proceedings. Besides India, there’s other markets like Indonesia and Thailand that could become more interesting but they do have their own individual challenges.
Besides Go-Jek, what are the other e-commerce/consumer internet/tech sector that you’d consider to invest in?
While we do not comment on companies we are currently evaluating, we focus on digital growth companies that are part of our ecosystems related to insurance: mobility, connected property, connected health, wealth management and retirement, and data intelligence and cybersecurity. Allianz X invests directly in companies that are strategic for the Allianz Group, thereby providing an interface between portfolio companies and the digital ecosystem within Allianz. Our investment team is constantly examining growth companies globally that could be relevant for Allianz operating entities and global business lines.
Several PE investors have previously mentioned that exits have been quite good in Southeast Asia, giving opportunity for other PE players to enter the region. What do you think about this trend?
For private equity investors, profitable exits and good realisations do indeed tend to justify new investments in any geography. As mentioned, we expect the Southeast Asian PE market to grow alongside the Chinese and Indian markets. Having said that, though, we expect the Southeast Asian PE market to be smaller than both these markets in the near term, as it is less mature and more fragmented. Within this context, VC activity in Indonesia could develop faster than overall SEA PE, given the large young tech-savvy population there.
Stressed asset space seems to be a huge opportunity in India. Do you look to enter the space via JV or float a separate vehicle?
This could indeed be one of the markets we would like to engage in. The current NPL situation on banks’ balance sheets indeed provides good opportunities for stressed lending and turnaround managers. We also hope to see more opportunities in the senior secured corporate and real estate lending space. Given the shortage of capital that is now reinforced by the NBFC credit crunch, private credit funds should be able to benefit and achieve more scale.
As Allianz invests significantly into real estate – how do you view the property market in Asia as we go into 2019? Allianz has tied up with a real estate fund in India. Do you look to do something similar in Southeast Asia?
Allianz has fast-growing insurance businesses in key markets in Southeast Asia such as Thailand, Indonesia and Thailand, which have become sizeable over the years. This opens up opportunities for Allianz Real Estate to explore and evaluate property investments in the logistics, office and retail property sectors in these same markets to ride on the region’s fast-growing consumption trends.
Asia’s property markets kicked off 2019 with growing headwinds, with concerns over a global trade war, rising interest rates and increasing valuations. Allianz is a long term institutional investor. Our investments are aligned to underlying economic trends.
Despite the headwinds, on a relative basis, we find Asia as an ideal destination for securing diversification as well as secular growth trends. Our focus in 2019 will continue to be on office and logistics sectors especially in fast growing markets like China, India and SEA. Real estate investments in retail, and developing markets like Australia and Japan, will be selective and focused on generating stabilised yield.
Go-Jek is said to have secured $2 billion for its new funding round, did Allianz participate in the round?
While we cannot comment on Go-Jek’s existing round, I can confirm that Allianz’s digital investment unit, Allianz X, invested $35 million in Go-Jek’s prior funding round in April 2018. This was Allianz X’s first transaction in an Asia-headquartered company. Go-Jek has had an ongoing strategic partnership with Allianz Indonesia since 2016 whereby Allianz Indonesia provided health insurance services to Go-Jek drivers. In 2017, this offering was expanded to allow Go-Jek drivers the ability to purchase health insurance for their family.