Insurance Asset Risk has published a report exploring the IG private credit boom, sponsored by Nuveen.
Over the last decade, the investment grade (IG) private credit market has remained buoyant and somewhat immune to all the shocks thrown at it.
Despite a global pandemic, a land war in Europe and its economic implications, three contentious US elections (including the most recent one), escalation of conflicts in the Middle East, and various economies dipping into and out of recessions, the IG private credit market has thrived.
This seemingly innate ability to survive seems to come from the depth and breadth that comes with this asset class.
Much of the growth has been drawn from the increasing pressure brought by regulators onto banks and other lenders in the aftermath of the Great Financial Crisis of fifteen years ago.
This caused many of those banks and lenders to pull back from the market. And it is within this gap that the market for IG private credit has found its place to grow. This, in turn, has led to more and more players coming into the market – nature, it is known, abhors a vacuum.
Other factors, such as the illiquidity premium found in private markets, have contributed fuelling insurers' appetite for the asset class, and drive this booming market. The increase in IG private credit as a proportion of the financial sector has been so steep that even the Bank of England has begun to look, through its Financial Stability Report, at where risk may be introduced into the economy through the growth in private equity and associated lending. How this will shake out in the long run will be an interesting aspect of the market to watch.
We have also seen in recent years a rise in prominence in private ABS investments. As those traditional providers of capital have stepped back, private ABS issuers have been drawn more to engage in the structural requirements set in place to make the asset a viable option. Another area that has seen interesting developments are C-PACE structures, as many of the issuers involved in this space may have moved towards IG private credit as they became too large to tap into the public markets.
All this is having its own impacts. Insurers interviewed for this report intimate that there is a dearth of long-dated issuance that matches liabilities. The flow of new entrants into the sector risks putting pressure on existing entities, but may also lead to the slackening of terms.
There were other issues that respondents were looking at, chiefly on whether inflation would now, after so long, begin to come down.
Recessions crept into their comments, too, although the assumption was that any recession would be a mild one.
One key issue looking ahead is how the US presidential election's outcome will play out in markets, as interviewees anticipate it will have a six month to a year impact, before coming back to 'normal'.
There is a lot to unpack in this special report on IG private credit.
The report is made up of three parts. The first is a roundtable of insurance stakeholders discussing current trends in the IG private credit space, notably the hype around private ABS.
The second part is a whitepaper by Nuveen looking at how proprietary sourcing and diversification can improve investment outcomes for insurers.
And the final part of the report consists of a series of interviews with investment leaders at insurance companies in the UK and the US comparing and contrasting the IG private markets on both sides of the pond.
Channels:Real assets