Why insurers are deepening investment in the $1.7T private credit space

Attracted by higher returns and portfolio diversification, insurance companies are increasingly turning to the booming private credit market. 

The vast majority of insurers in North America (96%) and Asia-Pacific (96%) plan to boost allocations to private markets within the next two years, according to a BlackRock survey conducted in July-September. Carriers are targeting several categories, with some 46% of the 410 senior industry executives polled looking to beef up investment in opportunistic private debt, 40% in private placements, 39% in direct lending and 34% in infrastructure debt.

The private credit market involves non-bank institutions lending directly to corporate borrowers, providing an alternative to traditional bank loans with potentially higher returns for investors.

Insurers have long been exposing themselves to private asset classes that match their long-term liabilities “so they can earn the illiquidity premium,” said Drayton D’Silva, CEO and chief investment officer of alternative investment firm Tower Hills Capital. 

“However, many investors seem to be happy to take an illiquidity discount because the true volatility of private investments is masked, so the risk-adjusted returns of private investments seem higher as the underlying assets are marked-to-model; Cliff Asness of AQR calls this ‘volatility laundering,’” he added.

Even with this shift toward private markets, some 74% of insurers do not expect to change their current investment risk profiles, per BlackRock’s survey, which tracked 32 markets representing $27T in assets.

The appeal of private placements for life insurers, the Chicago Fed said, “is that their maturity composition better aligns with life insurers’ preferred investment strategy of duration matching than publicly traded bonds. Life insurers prefer to invest in assets that match their long-dated (20-plus year) liabilities.” Another benefit is the opportunity for life insurers to diversify “into a broader set of companies and assets outside of public markets.”

A number of insurers have already invested in private credit, either directly or through external managers, including American International Group (AIG) and MetLife (MET). The insurance arms of some alternative asset managers, such as Blackstone (BX), Apollo Global Management (APO) and KKR (KKR), have been investing in private credit for years. On Wednesday, Bloomberg reported that BlackRock (BLK) was in talks with Jio Financial Services, of which billionaire Mukesh Ambani owns a hefty stake, to establish a private credit venture in India.

“Many non-bank lenders are looking for reliable sources of long-dated capital, so this makes for a good match for insurance capital,” said Christian Faes, founder and CEO of investment firm Faes & Co. “This is a trend that has been going for a few years now, and Apollo (APO) was a trailblazer with their Athene business. We expect that this is a trend that will continue to gain momentum in the market.”

Last month, Citigroup (C) and Apollo (APO) joined forces to form a landmark $25B private credit, direct lending program, which involved Apollo’s insurance unit Athene.

Private credit-related ETFs: (VPC), (PSP), (TAKNX), (TAKIX), (FBSPX), (CRDEX), (FTPCX)