MetLife goes with what it knows for new institutional business
Real estate, private placement strategies are areas of expertise
By Kevin Olsen | October 15, 2012
MetLife Inc. is returning to the institutional money management business through its experience in real estate, mortgages and private placement, areas that consultants and MetLife's Steven Goulart, executive vice president and chief investment officer, agree are seeing increased investor interest.
MetLife on Oct. 8 announced it is launching MetLife Investment Management, which will target public and private pension funds, sovereign wealth funds and insurance companies wanting to outsource.
The new unit will be split into two divisions: MetLife Real Estate Investors, which will manage real estate equity and commercial mortgages; and MetLife Private Capital Investors, which will handle private placement debt, project finance and infrastructure debt and equity in renewable energy.
“Their story should be plausible — they have recognized expertise in both areas they are concentrating on,” said Stephen Nesbitt, CEO of alternatives consultant Cliffwater LLC, Marina del Rey, Calif.
Mr. Nesbitt said his firm is seeing more interest in both asset classes, particularly in private debt as it provides a more stable cash flow in a low-interest-rate environment. He viewed MetLife's move as a way to leverage its core competencies.
“It sounds like both products are right for the time,” Mr. Nesbitt said. “The only issue is what they will use as a track record.”
For example, the assets that have been managed for the insurer's own general account likely have imposed limitations or statutory restrictions that might not apply to pension funds.
Mr. Goulart declined to discuss what track record will be used.
MetLife currently manages $50 billion in private placements, $43 billion in real estate loans and $10 billion in direct real estate, all general account assets. It also manages about $20 billion for institutional investors, but mostly in indexed assets that are roughly split 50/50 between equity and fixed income.
Janie Kass, San Francisco-based managing director at money manager consultant Margolis Advisory Group Inc., said MetLife looks to be positioning itself to compete with Prudential Financial Inc., but she does not know the details of MetLife's strategy. Prudential Real Estate manages $75.5 billion in real estate, $35.5 billion in equity and $39.7 billion in mortgages, all as of June 30. It manages $36.8 billion — $23 billion in equity, $13.7 billion in mortgages and $100 million in mezzanine debt — in U.S. institutional tax-exempt assets. Prudential also manages $62.5 billion in private placement, including $11.4 billion for third-party clients.
Consultants think MetLife can win institutional mandates, but stressed patience and a long-term commitment are essential to building the business.
Ms. Kass said it is a “natural extension” for MetLife to build on its strengths with a money management business, but the firm needs to build up its marketing and client servicing distribution to get the name out to potential institutional clients. “It's very likely they will get institutional investor money, it just will take some time.”
Jeb Doggett, partner at Casey Quirk & Associates LLC, a consultant to money managers in Darien, Conn., agreed that MetLife cannot underestimate the importance of those areas. He said it will take at least a three- to five-year commitment to build the business, and MetLife must be able to attract and retain talent.
“Historically, they've never had to compete for assets and that's a big change,” Mr. Doggett said. However, “the strategy MetLife is taking, in focusing on areas they have competency, will help in getting institutional investors.”
As part of the expansion, MetLife expects to hire at least 20 people help in areas such as fundraising, marketing and client servicing, MetLife's Mr. Goulart said.
MetLife already has great name recognition, but needs to have distribution to be reintroduced into the institutional community, Cliffwater's Mr. Nesbitt said.
MetLife has had third-party money management businesses in the past, but “the difference here is we are doing it organically and doing it with those people that built the general account business,” Mr. Goulart said. The company owned State Street Research & Management, selling it to BlackRock (BLK) Inc. (BLK) in 2004.
“We think it's a very good opportunity in spite of the interest-rate environment,” Mr. Goulart said about the private debt business. Pension plans “don't typically have access to these asset classes. It's very good and useful for liability-driven investing techniques.”
Ms. Kass said insurance companies historically are good with risk management, adding that although other insurers are the most natural investors in MetLife's strategies, other institutional investors already in those asset classes will look at MetLife favorably.
“Some of these areas of debt tend to be within a small group that has access to it ... with a position of less risk,” Ms. Kass said.
Mr. Goulart said he could not go into details on specific strategies.
Mr. Nesbitt said large insurance companies typically have “proprietary deal flows,” which should help MetLife in terms of access to private debt, but said institutional investors need to ask MetLife what is being allocated to the general account and what is going to clients. A company like MetLife would usually take fiduciary responsibility, but it is something investors should address, he added.
Long term, Mr. Doggett of Casey Quirk said, insurance companies are well-positioned for business from pension plans looking to implement liability-driven investment strategies.
Mr. Nesbitt said private debt is providing 6% to 8% returns compared to 2% for liquid debt. But he's not so sure that corporate plans with LDI strategies would be as interested in MetLife's offerings because private debt carries considerable credit risk, which most plans do not want with LDI. “So it's not a perfect fit,” he said.
This article originally appeared in the October 15, 2012 print issue as, "MetLife goes with what it knows for new business".