In a recent survey of insurers that we conducted, 42% stated that they were seeking greater exposure to private markets.
This trend broadly follows the market sentiment not just for insurers but also pension plans, foundations and endowment funds. It also re-raises the perplexing problem for regulators and insurance board directors: how concerned should we really be with liquidity risk?
In detail, the annual Insurance Asset Management – Industry Insights survey found 39% of insurers favoured private placements and 33% were eager to incorporate private equity. This is of little surprise given the historically low (and possibly even to go lower still) state of government backed and triple-AAA rated corporate debt. However, it does pose an interesting problem: whilst private markets are far less liquid, they are one of the most direct routes to stimulating the economy whilst invigorating returns, but (and it’s a big one) should a sudden spasm in financial markets occur, the liquidity risk will come to the fore front.
However, many managers are addressing the issue through ‘multi-asset class’ funds, whereby the exposure, as well as returns offered, in private markets can be secured but the illiquidity risk be minimised.
Additionally, volatility is minimised, as Trevor Castledine, Deputy Chief Investment Officer at the Local Pension Partnership Investments explains: “As far as volatility goes, some credit strategies will give a much lower volatility outcome than others, simply because of the mark-to-market methodology; selecting private credit strategies which are often marked at par unless they are impaired is a much lower volatility strategy than selecting investments in, say, traded senior loans or ABS paper”
Whilst the headache of low fixed income returns will likely continue for the foreseeable future, the question of diversifying the problem away may be just beginning to gather pace, through the multi-asset class sector.
Whichever way central banks go, our prediction is, 2017 will be the year of private markets. Regulators and plan and insurance sponsors need to be prepared.
To read more:
- Insurance Asset Management – Industry Insight
- Investing in Multi-Asset Credit Strategies
