Marno Jooste, head of structured credit at Pension Insurance Corporation (PIC), outlines how he and PIC’s private debt origination team tackle private credit opportunities…
Alternative Credit Investor (ACI): What does PIC do?
Marno Jooste (MJ): We insure one type of risk – liabilities of UK defined benefit (DB) pension schemes. Corporates looking to derisk their balance sheets will come to PIC, and we will either buy in and insure a portion of that liability scheme or execute a buyout, which takes on their assets and liabilities and we become responsible for running the scheme. They pay an insurance premium for that, and it becomes our responsibility to meet those pension payments. Our main focus is liability matching which involves us finding assets to pay out those liabilities – often for decades to come.
We’re governed by Solvency UK and the PRA, which require us to meet strictly defined asset eligibility criteria. Fundamentally, we must make sure we can match those pension liabilities. This limits our investable universe.
ACI: How big a role does private credit play here?
MJ: PIC has roughly £50bn of assets on its balance sheet. The portfolio is made up of cash and gilts, a large portfolio of public credit and we have invested in over £14bn of private assets. That allocation between public and private assets is very dynamic and changes based on where we can find the best relative value. I joined PIC in 2017. Back then, private assets were providing a significant premium over public assets. As other investors became more sophisticated and entered these markets, that premia decreased.
Our peers have similar liability profiles, but we’re all taking on different pension schemes, so everyone operates slightly differently within their own regulatory models. With assets, we are essentially looking for investment grade, long duration cashflows. That naturally leads us to regulated sectors such as infrastructure, utilities, social housing, student accommodation and related sectors.
ACI: Where are you seeing good opportunities right now?
MJ: One area that continues to provide attractive opportunities is infrastructure. Although the number is fewer, we see some really attractive investment opportunities, both in terms of attractive prices and long duration. For instance, we just invested £300m in the Haweswater Aqueduct Resilience programme which was a long date, inflation-linked asset which matches our liabilities well.
Elsewhere, the fund finance space is an interesting one where we’ve made significant progress. While we’re trying to find long duration assets, we still need shorter-dated cashflows. Therefore, we’re looking for the highest yielding opportunities and the fund finance space has provided quite a few over the last two years. Real estate is another interesting area where we have invested in a wide range of projects in the UK.
We think those long duration, inflation-linked opportunities are very good assets for PIC. However, the opportunity set is quite small, especially with the volatility over the last year discouraging borrowers from the market. That means we have started venturing into new markets, such as Southern and Eastern Europe and South America.
ACI: How challenging is it to access those new markets?
MJ: It makes sense to focus closer to home initially. However, as the team and expertise have grown, we have expanded our asset origination capabilities and, to be frank, while we are determined to invest more in the UK, there are just not enough investment opportunities here to match the massive amounts of liabilities coming through the pension risk transfer market.
That means we have to look at new markets to find assets to match those pension liabilities. The natural step is to our neighbours in Europe, looking at things like infrastructure, fund finance, corporates and real estate. The US is the largest market so there will naturally be more opportunities there too.
Having the resources to access new markets is a really big consideration for us. How much time and effort do we need to spend on a new market or sector? Additionally, is there enough supply available for us, such that we could reap the benefits over the next 10 to 15 years? As a large organisation we’re investing actively every year. We’re not going to go in for one-off deals.
ACI: Private credit has grown rapidly in recent years – what are your views on this?
MJ: When I joined, there were five in our private asset origination team and we’re now at 12. That tells you how the space has grown over the last couple of years as markets have developed and borrowers have realised there is a big demand for quality assets from investors like insurance companies. That was fuelled even more when we had the sharp increase in rates, when more DB pension funds became fully funded and looked to de-risk.
It’s a very innovative space to work in, one of the few high-growth areas within the financial sector. The downside is increased regulatory scrutiny, and perhaps a slightly slower deployment of the assets you want to invest in. Given how closely regulated our industry is, growth has been quick but the controls in place have allowed for a safe trajectory.
ACI: As an investor, what risks are you keeping an eye on right now?
MJ: The obvious issue is the uncertainty in the market. The tariffs that the USA has implemented have really shaken up the global political system which means a lot of the borrowers don’t want to come to the markets. US credit spreads are at or near all-time tights, the UK market is similarly at historical tights. We’ve got massive spread compression despite a very volatile political and macro picture, which doesn’t stack up. In a volatile market environment, you would think risk premia and spreads should rise, but we’ve not really seen much of that. Investors still find the current yields attractive.
On top of that, there’s a lot of money sitting on the sidelines. Basically, every private equity or private credit fund has raised billions of capital but not deployed it, creating massive demand for assets but without enough supply. That can lead some investors to overpay for assets and to compromise their credit discipline. Some borrowers are now getting away with lighter covenants on their documents and some investors are willing to give those up just to deploy capital. That’s where you need to find a good balance of pricing assets correctly while also ensuring you maintain your credit underwriting standards.
