Current Relax in Regulation Brings a New Era of Alternatives in Taiwan.
I believe you already know that lifers in Taiwan are strictly regulated, especially when it comes to investments. However, the current relaxation in regulation gives lifers a bit more room to invest in alternatives. “Regulations Governing Foreign Investments by Insurance Companies” is one of the most important regulations for lifers, since nearly over 60% of the investments are offshore. At 2018/11/21, after years of lobbying, the limit for hedge funds and privately offered funds have finally loosen, from 2% to 3% of their funds. The change has relaxed as much as USD8.3 billion of lifers’ alternatives investment limits.
Appetite for Alternatives are Growing
We have observed that the appetite for lifers in alternative assets is growing, and it started way before the current relaxation in regulation. One of the main reasons is that Taiwan is under a low interest rate environment (with 1% yield in 10 yrs. govt bond) for several years and the competition among lifers are getting intense. Most of the lifers provide a minimum 2.5%-3% policy rate. In order to meet the guaranteed rate, lifers are looking for (1) foreign investment assets (2) alternative assets with higher yields and longer investment terms. In 2017/2018 alternatives subscription amount has grown by yoy+60%/+46% respectively.
What’s the Key Factor affecting Lifers’ Investment decisions?
Regulation is no doubt the key factor when lifers make decisions. Regulation not only affects the investment limits as we mentioned earlier, but also influence the capital requirement of insurance companies, and thus plays a very important role in lifers’ investment decision making process.
Since asset classification is the basics of understanding lifers’ investment decisions, before we get into an example of how regulations deeply affect lifers’ decision, we’ll talk about the asset classification first. As many of you may know, the “Regulations Governing Foreign Investments by Insurance Companies” have classified offshore funds into 8 types, in which we have identified Hedge funds, Privately offered funds( includes private equity, private debt, private real estate fund ), Infrastructure funds as alternatives. Taiwan authorities have put different limit and constraints on different type of funds and thus cause different investment preferences.
Take infrastructure fund as an example, we have observed a significant increase in Infrastructure funds (submit amount increased by 525% from 2015 to 2018). The main reason is the change in the calculation of RBC (risk-based capital). Before 2015, the risk factor for calculating required risk capital of infrastructure funds was 0.2950, same as for privately offered funds. Under same risk required capital, it is obviously not a good idea to choose infrastructure funds over other assets with higher yields. After years of petition, the risk factor for infrastructure funds has reduced to 0.1018 in 2015, and that of privately offered funds has reduced to 0.2638 in the same year as well. This experience taught us that a slight change in regulation can cause a huge difference in investment decisions. This why we, NIC, have closely monitored the market and how our clients interacted with these changes.
NIC Findings: Alternative Investment Behavior
After collecting, sorting and mapping each lifers’ alternative investments, NIC’s in-house research discovered some interesting alternatives investment behavior of lifers. Such as,
Lifers tend to buy from large/ famous fund house
Lifers tend to buy from fund houses of lifers’ existing investments
Lifers tend to buy similar targets (Peers Effect)
Fund house that have established long term relationships with lifers.
Average deal is around $30-40 million
We have identified some characteristics that lifers present when making alternative investments through data and frequent interviews with related professionals. In the past few months, we have observed subtle signs of interesting changes among lifers’ alternative investments. It seems that lifers in Taiwan are expanding their investment universe now. We would be happy to share our knowledge and thoughts regarding to the market. Please feel free to contact us if you are looking for more details and insights.