Dominic Maier: First, I want to start with a caveat. In today's environment, with inflation being where it is, and interest rates rising, combined with global supply chain risks and geopolitical and macroeconomic issues means that some of this is difficult to predict.
However, I would advocate that in order to make sure returns remain attractive for policyholders, insurance firms should look to take an appropriate level of risk.
That means ensuring that there are alternative equities within their portfolios that are meaningful -the level of how meaningful being a relative measure - but they should exist across all insurance firms.
"I would suggest firms continue to invest in alternative assets, particularly
when the world is heading into a scarier place."
Particularly when you consider that insurance firms in the US and Asia, as a generalisation, allocate more capital towards these riskier assets, and they have shown stronger returns due to that because of the over-performance of that asset class.
I would therefore suggest firms continue to invest in alternative assets, particularly when the world is heading into a scarier place as vintages during recessions tend perform strongly. Firms must make sure that there is that forward thinking and to start adding it to the allocation now. The potential supply/demand imbalance could drive strong return potential if historical numbers are to be believed.
Dominic: As background, I focus solely on Venture and Growth and this asset class enjoyed a strong run of performance over the past decade. There has been a recent correction of public market multiples, which was prior to the geopolitical and macroeconomic issues that we are seeing more recently. This means that my perspective is somewhat skewed.
"Investment continues but in a different context compared to last year,
especially the last six months of 2021."
More broadly, in terms of an economic downturn, there seems to be indicators that this is imminent. Investment pace has also slowed down due to the uncertainty in the markets. However underlying secular trends for technology - both technology adoption on the business-to-business side and technology adoption on the consumer side - are such that it is difficult to see a world where more global GDP doesn't become driven by technology over the medium- to long-term.
In light of that investment continues but in a different context compared to last year, especially the last six months of 2021. Let’s contrast this to the great financial crisis where buyouts stopped, partly as deals could not get debt financing, there were quarters of highly limited investment activity. This time around, it doesn't seem like it is going to happen, especially in technology-driven Venture and Growth investing.
Dominic: Insurance firms have a lot of data, and they use it in their core business for decision-making. This core competency of data should extend to investment teams, and they should use the data they have and look for uncorrelated sources of return to the rest of the book.
"The ability to continue to drive returns in all market conditions rests on
having a book that has this ability."
Assuming that book is mostly debt and listed equities. Debt, naturally, brings with it a lot of interest rate risk and credit risk. If you look at which asset classes have significant less correlation to some of those risks, it does come back to alternative assets that do not use any debt in their capital structure. And this is mainly Venture and Growth, both within technology and life sciences.
Therefore, the ability to continue to drive returns in all market conditions rests on having a book that has this ability, such as through a Venture and Growth allocation. It will also ensure that that that return profile has upside to drive the necessary returns for policyholders.
