Private debt marries access with opportunity for insurers 

Private debt has been a hot topic in the insurance industry, and with good reason. Today’s fertile market opportunity coupled with an increasing spectrum of collateral choices, and the proliferation of capital efficient vehicles, has made this long-standing asset class even more accessible to the insurance industry.

When evaluating the potential benefits of private debt, investors should focus on origination and sourcing platforms, loss mitigation, investment structure and, of course, fees.  As we experience a period of higher loan yields and dwindling global lending by banks in the wake of the recent bank failures, the value proposition for credit investing is clear.

Insurers have complex needs compared to other institutional investors. There has been an accumulation of structured assets in insurance company portfolios and potential changes to the regulatory framework have weighed on allocation decisions. Historically, private debt has been able to align portfolios to accommodate these obligations while offering yield enhancement, diversification and other strategic considerations.

Moreover, the proliferation of new private debt strategies and collateral in recent years has given investors more opportunities for increased diversification and customisation, offering greater choice but requiring close examination to evaluate the appropriateness for each unique balance sheet. 

An example of this is asset-based finance – an emerging subset of private debt where the cashflow profile is driven by the performance of a pool of collateral rather than the performance of a single operating company.

Another strategy that offers increased diversification is opportunistic credit – a subset of private debt that is attractive when the dispersion in credit may offer equity-like upside with the downside protection afforded to secured lenders.

Alongside a greater spectrum of opportunities, one of the biggest drivers of growth of private debt in insurers’ portfolios has been the emergence of capital-efficient investment vehicles designed to optimise risk-adjusted returns while taking a range of regulatory and capital requirements into account.

New capital-efficient vehicles have supported the growth of private debt investments by the insurance industry and can play a key role in a well-diversified portfolio of assets for insurers, where private debt can offer resilience and contractual return-based characteristics that are particularly helpful during periods of market uncertainty.

Why might now be an opportune time to invest in private credit? In short, we believe the environment is ripe for dispersion, which means opportunities are available for skilled providers of capital.  Yields are up across the credit spectrum, the supply of capital is dwindling, and higher debt servicing costs are weighing on economic growth. As a result, private credit lenders with access to capital are well positioned to fill the void for borrowers who can no longer access traditional forms of bank financing.  

Historically, central bank tightening has led to crises of one form or another, and most hiking cycles are driven by inflation – which remains high, along with the core ingredient for sustained inflation: a tight labour supply. Rising rates are also squeezing those that benefited most from low interest rates, as well as the financial institutions that provided them with the financing. 

The economic backdrop then, remains challenging. Meanwhile, timing, diversification and fund selection remain critical elements to be evaluated. A diversified approach across the components of a distress cycle may be best accomplished through a multi-manager approach, and, not surprisingly, dispersion between fund returns remains an investor’s top consideration, with manager selection a key to success.

The private credit opportunity is one that many insurers have taken note of and others may want to explore further. If you would like to speak to one of our insurance or private debt specialists, contact us via the form below.