Private Capital: Have we missed the boat?

A Wall Street luminary once spotted a stock bubble through the growing number of cab drivers that told him they had bought dotcom. The Lens heard no such worrying talk from our good cabby about private capital – but once we arrived at a recent CAMRADATA insurance breakfast we found caution in the room about this popular alternative asset class.

There has been great appetite for private capital in recent years – and there still is, particularly private debt. But as we breakfasted with senior insurance investors, some clearly suspected the asset class had run much of its course during the current cycle.

Decreasing returns were the signal and though a number of insurers were still interested in certain private markets – including equity – they felt they may have “missed the boat”.

They noted more asset managers were still coming out of the woodwork with products, but the insurers would prefer to put capital with managers already holding track records.

Something else The Lens learned over smoked kippers was although interest in infrastructure debt held steady, there was a concern some investors might end up holding real estate once a loan runs out. For some, this would be as welcome as a rotten kipper.

But what interested The Lens more was the group’s general bullishness about government bonds. At the time, 10-year govvies were yielding above 3% meaning asset managers offering absolute-return targets of cash plus 3-5% might need to increase that if insurers were to not only justify moving away from government bonds, but merely to maintain an absolute return exposure.

That said, there was much interest in the concept of absolute return strategies and asimilar interest in illiquid credit, especially distressed debt which some around the table already held.

And then there were collateralised loan obligations (CLOs). The Lens heard that a recent ruling in the US challenged the risk-retention rule that requires issuers to have a minimum stake in their product. CLOs issued in the US may no longer need to conform to the 5% rule – but the upshot is that European investors may not be able to own them.

Still talking about securitisation, one insurer highlighted proposed changes to European regulations that could reduce the capital charge for Type 1 securitisations but not for Type 2. This would be good news, though insurers are still open to investing in asset classes with slightly higher Solvency II charges if the result is better diversification and no change in the overall risk bucket.

The next CAMRADATA quarterly insurance breakfast is in August. The Lens will update you with any relevant perspective from our insurers, and from our cabby.