Richard Roberts, director of Emea and Apac insurance solutions at AllianceBernstein, discusses the opportunities private debt offers insurers. He also gives his outlook for private debt in 2024 and the issues to consider
What advantages does private debt offer insurers' investment portfolios?
Private debt asset classes should hold a prominent position within most insurance investment asset allocations.
In the last 5-10 years, earning an illiquidity premium and being able to allocate to assets that help match liability characteristics have been prominent drivers. Undoubtedly, they remain key drivers, but our conversations with insurers now include a broader array of factors, such as diversifying risk exposures, accessing uncorrelated returns, seeking inflation alignment and aligning to achieving environmental or social aspects.
Additionally, insurers are not having to pick up an increased capital charge over equivalent quality and duration public debt, so assuming an illiquidity premium can be earned, private debt looks like an efficient use of capital.
When thinking about an allocation there are of course constraining factors, such as liquidity appetite and having the resource to source, or oversee managers who source investments – but Insurers have to consider multiple objectives and private debt has strong alignment to many of them.
Is now a good time for insurers to invest in private debt? Why?
After multiple years of steady increases in private debt allocations, 2023 was a year of internal focus for many as they adjusted to the new rate environment and its impacts on their investment strategy and asset allocation positioning.
We've started 2024 with an expectation of softening corporate fundamentals, a slight slowdown in growth and reducing, but still above target inflation. Against that backdrop, doubling down on risk exposure diversification makes a lot of sense and private debt can help achieve that.
Couple that with the ability to be very selective in a lot of these asset classes and the outlook can bring plentiful opportunity. Consider the commercial real estate debt market – whilst there are a number of concerns, the backdrop offers a good opportunity to deploy selectively and achieve attractive risk adjusted returns with the added benefit of collateralisation.
When it comes to private debt, how do investors strike the right balance when determining a suitable allocation for their portfolios?
Each insurer's circumstances and starting position will differ. What is right for one may not be right for another, but there are common factors. Liquidity considerations will combine both liability needs and asset availability views. The last couple of years provide a good rear view mirror to view stressed liability requirements.
On the asset side, one of the most important things to remember is liquidity is really not a binary consideration – liquidity of both public and private markets is a spectrum and how you factor that into your liquidity appetite is key. Other common constraining factors include the resources to source or oversee, the starting accounting position (e.g. P&L management) and the solvency capital budget.
Once you have a view on those aspects, the focus turns to thinking about the objectives you are seeking to achieve – are you ultimately seeking yield, managing surplus volatility or something else? Additionally, what risk, return and correlation levels do you expect from your range of investment options?
Ultimately, all of these factors should be incorporated into an insurers' strategic asset allocation process. With so many considerations, it's sensible not to over-optimise, but to consider a broad range of potential scenarios and sensitivity to changes in key inputs and constraints.
