For insurers seeking investments in private credit, business development companies (BDCs) present “distinct advantages”, including a straightforward balance sheet treatment as equities, immediate diversification, and 100 per cent liquidity.
The argument is made in a study published by US-headquartered firm Muzinich & Co., which looked at how insurers can potentially boost income and reduce correlation risk by investing in the asset class.
Read more: BDCs represent ‘ideal vehicle’ for private credit exposure
The authors of the study argue that when BDCs are publicly traded, they provide insurers with a scalable and efficient pathway into private credit, avoiding the limitations set by traditional structures, such as private equity limited partnerships.
One of the advantages of listed BDCs is that they provide greater transparency for investors as they are governed by the Securities and Exchange Commission and have to disclose audited financials on a quarterly basis.
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Particularly when actively managed, a modest allocation to BDCs can enhance yield, reduce correlation to core bond holdings, and offer attractive risk-adjusted returns, the study estimates.
While significant differences in performance exist among BDCs, the sector is maturing and shows improved volatility and resilience across market stress events, the study points out. Hence why insurers managing surplus volatility and regulatory capital should give the asset class “serious consideration”, the authors argue.
Muzinich & Co. has calculated that over the past decade, BDCs have grown from $33bn (£24.8bn) held by 45 BDCs to $84bn (£63.1bn) held by 51 BDCs.
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