According to the latest findings from Mercer and Marsh McLennan’s 2024 global insurance investment survey, insurers are showing a discernible tilt towards private debt, with 73% of total respondents reporting either current investments or a plan to increase allocations to the asset class this year.
The survey covered 22 markets in the USA, Canada and Europe. In discussing the criteria for capital deployment, insurers prioritized the selection of skillful managers in the private markets. The allure of private debt lies in its potential for attractive risk-adjusted yields, particularly in contrast to traditional fixed-income instruments.
Arif Bhalwani, CEO of Third Eye Capital, an alternative capital provider based in Toronto, has stated that private debt will continue to offer compelling returns to investors. “Despite challenges like rising rates and a potential economic slowdown,” says Bhalwani, “private debt remains attractive because of fewer financing options, which results in benefits such as wider credit spreads, lower leverage, and stronger documentation.”
The Mercer report states that the “longer-term trend into private markets and alternatives continued throughout 2023, with private debt a particular focal point. 27% percent of insurers reported increased allocations to investment-grade private debt.”
It’s clear that insurers are actively embracing private debt as a strategic investment avenue, aiming to capitalize on its inherent advantages. Mercer’s survey findings forecast a continued inclination towards private debt allocations.
The rationale behind this pivot towards private debt is multifaceted. Insurers are drawn to the potential for higher yields offered by private debt instruments, coupled with the diversification benefits they provide within investment portfolios. Also, in an environment characterized by low-interest rates and market volatility, private debt offers a compelling proposition for generating consistent returns with skilled managers able to mitigate the downsides.
The illiquidity premium associated with private debt investments is viewed by insurers as a worthwhile trade-off for the enhanced returns and portfolio stability they offer over the long term. By incorporating private debt into their investment strategies, insurers aim to achieve a more balanced and resilient portfolio composition in the face of ever-changing market dynamics.
“On the one hand, higher cash returns raise the bar for investing in private debt,” says Denis Walsh of Mercer in the report. “On the other hand, private debt spreads continue to be meaningful like venture debt, and all-in yields are typically well above those of high-yield bonds and leveraged loans,”
As insurers venture further into the asset class, they must contend with complexities such as due diligence, credit assessment, and ongoing portfolio management associated with investing in private debt markets. This is where skilled managers become very valuable, especially with regard to sourcing, structuring and protecting the downside.
“I think it’s crucial to maintain a balanced perspective during this so-called golden age”,” continues Third Eye Capital’s Bhalwani. “Companies are facing increased pressure from higher interest burdens and refinancing challenges as debts mature. Successful private debt managers need to be willing and able to restructure, foreclose, or even manage businesses directly to protect their investors.” .”
In contrast with private debt, the real estate equity class saw the largest decrease among insurers in the last 12 months, although 17% said they would increase their allocations.
The momentum behind private debt investment among insurers is enjoying a considerable tailwind, driven by the prospects of yield enhancement, portfolio diversification, and risk mitigation. As insurers continue to recalibrate their investment strategies in response to evolving market conditions, private debt is poised to play an increasingly prominent role in shaping the future of insurance investment in Canada and beyond.