As insurers up their allocations to private credit, they are expanding into different segments of the asset class, leading to greater use of consultants to support their investment decisions.
Insurers have invested in private credit for many years, with life insurers in particular attracted to the long-term investment opportunities on offer and steady returns.
However, their demands are changing. Historically focused on corporate direct lending, insurers are now turning towards asset-backed lending, particularly in the US, to achieve greater diversification and tap into shorter duration products.
Katie Cowan, head of insurance client solutions at First Eagle Investments, has witnessed this trend, but highlights the challenges it presents due to the complex nature of asset-backed finance (ABF).
ABF, which broadly refers to financing arrangements secured by assets, is “not as uniform” as direct lending. It is often associated with a complexity or illiquidity premium, which has “kept investors in the past from coming to the table”, Cowan said. Alongside this, from a manager perspective, there is also a greater need for education in the space.
“A lot of things in the structured credit world are new and unique and speciality finance securitisation isn’t as prevalent,” Cowan added. “An education process is something insurers lean on consultants for [within this space].”
This has resulted in greater use of consultancies such as Mercer and Willis Towers Watson, which recommend private credit strategies to their insurance clients.
“This is an esoteric asset class and some insurers are staffed and educated on these types of asset classes, and many are not,” Cowan told Alternative Credit Investor. “So, it is hard to underwrite a manager when you don’t have the expertise on the asset class yourself. That is why we are seeing an increase in use of consultants in the insurance space, [with] consultants staffing up their insurance dedicated teams.”
Consultants are seen to provide an additional layer of education to ensure decision-makers are comfortable signing off on allocations, she added.
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As the shift towards ABF gathers pace and the asset class continues to grow, the profile of investors allocating to the market has also evolved, moving beyond life insurers to include property and casualty insurers.
According to estimates from KKR, the private asset-backed finance market is expected to grow to $7.7tn (£5.7tn) by 2027. At the same time, the asset class has become increasingly embedded within private credit platforms and insurance. In 2023, for example, Blackstone Credit and Insurance launched its ABC platform (asset-based credit), bringing its ABF and insurance groups together under a single unit, while retaining a dedicated ABF team.
Many insurers were “burned” in the aftermath of the financial crisis and subsequently avoided the space altogether, Cowan said. However, she suggested that a bifurcation is now emerging, with some insurers now embracing the ABF space, often with the support of consultants, which will mean that it will remain “prevalent area for insurers to invest for many years”.
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