TIAA's chief investment officer Emilia Wiener talks about the opportunities and sticking points in the investment-grade private credit market.
Firstly, can you tell me a little about the setup at TIAA?
I'm the chief investment officer for the general account of TIAA. That's about a $300bn asset portfolio that's multijurisdictional, with global multi-credit and alternative strategies. It's a very diversified portfolio where about 85% of it is made up of fixed-income assets. That includes not only public and private bonds, but also structured bonds, along with a lot of emerging and developed market investments and commercial mortgages. The rest of the portfolio is invested in alternatives, which are predominantly real estate, infrastructure and private equities that produce both current income as well as capital gains in the longer term.
And how is your team set up?
My team is comprised of investment professionals that work very closely with Nuveen, our wholly owned asset manager, in managing the general account. Nuveen faces the market each day for us, and they make selections within sectors and with individual issuers that are consistent with our risk appetite and the investment guidelines and asset allocations that we provide them. We allocate to specific asset classes including public investment grade, public high yield, private investment grade, private high yield, and so on, consistent with our annual investment program. Each portfolio manager at Nuveen is as intimately familiar with the portfolio as we are, and we work with them to ensure we are capturing attractive risk adjusted returns in the portfolio.
How does investment grade private credit fit into your investments or assets?
It's a core allocation for us. What I mean when I say that is that I cannot imagine a time when our broad asset allocation would not include an amount allocated to private credit. I began my career in private credit, so I appreciate the asset class for its defensive nature—not only are you getting a premium for illiquidity and complexity, but you're also receiving covenant protection in the documents that gives you a voice if something starts to go sideways with the credit. You can work with the borrower or the issuer to get a better solution. And even in the cases when available solutions appear limited because you have been brought in early and your covenants have been triggered, the ultimate recovery tends to be better than is typical in a public bond situation.
How have those investments changed in recent years?
In 2017 our portfolio carried a heavier allocation to treasuries and agencies. It was super liquid, with a lower allocation to private investment grade than to public bonds. But over the past five or six years, we have really shifted that. We've reduced our treasuries and agencies position to take on more corporate credit. The lion's share of that repositioning went to private investment grade. Consequently, the private portfolio has grown over time. Public investments will still always be the majority of the portfolio, but we have been favouring private credit over the past several years. That shift happened because given the nature of our liabilities, the flow of our business and our robust capital position, we were willing to reduce liquidity while defensively building in higher yielding assets. We were doing that in a time when rates were ultra-low, and we felt that the increased premiums we were earning on private investment grade offered attractive relative value.
What shape is the market in now and what are you keeping an eye on?
The thing we're looking at in this space is whether inflation is going to—as it seems—be under control. There's also a sensitivity to recessions but if we have one, it's likely to be mild. I'm expecting a relatively benign credit cycle but that doesn't mean that we're not going to have an increased rate of defaults and losses. Anything that happens will, I suspect, be within the realm of expected outcomes—and certainly nothing as severe as we had with COVID or the Global Financial Crisis. There may be situations where companies have overpaid for an acquisition because, in retrospect, valuations were too high, and they might have to take write-offs in the future that leave them in a weaker financial position. We're always working through the portfolio, both public and private, to anticipate weaknesses, vulnerabilities, and potential downgrade risk. We're looking to create a portfolio that offers resilience in support of our liabilities, so we are diligent in culling the portfolio to maintain a defensive stance.
This is a two-part question. ABSs weren't popular in this sector a couple of years ago, but that has started to shift. Why are insurers now looking at these, and why are they hoping to achieve?
There are a few answers to that. For the longest time, going back ten to fifteen years, people hated structured credit. The reason they did not like it was because they got burned with all the high ratings on RMBS. They saw the downgrades and losses, and everything ended up getting tainted with the same brush. At the end of the day, though, it was very specific to housing and to subprime lending. The market has clearly evolved from there. The agencies have gotten more rigorous around rating structured products, and they have developed more expertise in doing it. As a result, we have seen a lot of different asset classes coming into the space such as franchise receivables, CPACE, and student loans. There's a lot of very interesting products out there that generate cashflows that can be structured. I include CLOs in that too. Even in the difficult times, CLO ratings for AAA and AA tranches held up very well. In a structured product, our preference is to stay high up in quality. It's something we focus on, and our allocations are measured to ensure we maintain a diversified portfolio. We want to err on the side of quality, so we'll move towards an AA or a AAA kind of paper. We'll also occasionally do an asset pool that's underwritten by one of our affiliates. We're comfortable with that underwriting. As asset managers and private equity have become more associated with insurers, they are learning the ability to create these asset-based platforms to generate third-party AUM. That's a big push in the world of structured products right now.
We've touched a little on CPACE in these interviews. How do you see that fitting into the market?
It's really a financing technique that fits into ESG investing because you are investing in energy efficiencies and ways to make a building greener. You are financing all that through a monetisation of the property taxes due on the improved property assessment that follows the improvements that are made. I find it to be a very attractive way to do a structured product while aligning with the low-carbon transition of the economy.
Can you tell me what else has been influencing your investment decisions in the last year?
The movement to higher rates has led us to consider more allocations to investment grade markets. We added high yield exposure for the incremental return it offers but investment grade asset classes became more attractive with higher prevailing interest rates. As a result, we've tilted more towards investment grade this year, including treasuries, which provides us another lever for managing our duration targets and ALM objectives.
What about the alternative side?
In private equity the market has seen a pause in terms of the rate at which the funds are able to make distributions. We have adjusted our allocations to reflect that, however, these changes are all at the margin of a $300bn asset portfolio. Our annual investment program might be anywhere between $20bn and $30bn and our target portfolio will continue to predominantly be an investment-grade fixed-income portfolio.