Following in the footsteps of other insurance giants, Sun Life Financial – Canada’s third-largest life insurer – announced the launch of its new third-party asset management business, Sun Life Investment Management, in February. The platform will offer three initial funds to Canada’s defined benefit pension plans, including open-ended core vehicles targeting real estate and commercial mortgages.
Managing clients’ assets is not unknown territory for Sun Life. The Toronto-based insurer has been in the mutual fund business for decades with Sun Life Global Investments in Canada and its US-based subsidiary MFS Investments. Additionally, a team of 200 manages C$110 billion in assets on the insurer’s own balance sheet, including approximately $38 billion in private markets investments.
According to Steve Peacher, president of Sun Life Investment Management and chief investment officer at Sun Life Financial, the success of the insurer’s own portfolio inspired the move into private pooled funds. “We asked ourselves, ‘Are there things that we do for ourselves that might be of interest to others as we look to expand to third-party asset management’?” he said.
Sun Life was prompted to launch the new business after witnessing two key trends in the institutional marketplace: the increasing interest in alternative asset classes and the inclination toward de-risking and liability-driven investing as pension plans become better funded. “Pension plans tend to want to take risk out of their asset base so they are not in danger of becoming underfunded again if markets go the wrong way,” said Peacher. “We manage our assets to meet our liabilities, so we are, by our essence, a liability-driven investor and we feel like we have the same skill sets.”
Sun Life Investment Management will be seeding its initial funds with assets off its balance sheet, starting with more than C$300 million in assets for the Sun Life Canadian Real Estate Fund and just under C$200 million in assets for the Sun Life Canadian Commercial Mortgage Fund. The real estate and debt funds will pursue the same strategy that Sun Life employs for its own portfolio by investing and lending across income-producing asset classes, including office, industrial, retail and multifamily. “Our house account is more of a seller than it is a buyer at the moment, so there’s no conflict of interest between us and the funds,” stated Phil Gillin, Sun Life’s real estate portfolio manager. Sun Life’s current C$5 billion real estate portfolio is comprised of more than 230 assets, while its C$7.5 billion mortgage portfolio is comprised of 1,450 loans.
Sun Life hopes to grow each new fund by C$100 million within the first year, eventually building them to become C$1 billion-plus vehicles. “It’s very labor-intensive to find good mortgage and real estate investments,” noted Peacher. “We wouldn’t be getting into this if, over time, we didn’t think we could raise billions of dollars of third-party money. Still, we’re going to do it in a methodical fashion because we don’t want to put ourselves in a position where we’ve raised more money than we can get invested in a reasonable period of time.”
The inception of Sun Life Investment Management comes at a time when more life insurance companies are becoming big players in real estate fund management. Along with long-time heavyweights like Prudential Real Estate Investors and TIAA-CREF, more recent entrants in the game include MetLife and Manulife Financial. In October 2012, MetLife announced it would be adding an asset management platform and a core property fund through its new subsidiary MetLife Real Estate Investors, while Manulife announced an expansion of its asset management business in November 2013 with its Manulife Asset Management Private Markets unit, which focuses on real estate, commercial mortgages and private placement debt.
“We didn’t do this because we saw some of our competitors do it, but we probably did it for the same reasons,” commented Peacher. “When MetLife made the announcement in the fall of 2012, it made sense to me. They are very strong in these asset classes, and we’re increasingly seeing insurance companies getting involved in third-party asset management. We all see the same opportunity.”
Gillin commented that Sun Life’s network of Canadian pension plans will help its first vehicles get off the ground. “We have a very strong relationship with the defined benefit investment community in Canada, so we’re very bullish about the possibility of success with these funds,” he said. “We’re looking forward to bringing them into asset classes that many would not have had the ability to access themselves, particularly on the smaller end of the pension market.”
Although Sun Life’s initial funds will focus solely on Canadian assets, Peacher hopes to grow the business across the border. “We would love to be able to figure out how to bring a US real estate fund to Canadian investors, but there are some negative tax consequences for Canadian funds investing in US real estate so we have to structure that in a way that’s tax efficient,” he said. He noted that Canadian pension plans have more interest in US real estate than in Canada’s, and that Sun Life is seeing the same attractive trends in the US as in Canada with its portfolio’s 125 US properties. “We think it could be a North American platform at some point,” he added.