FTLife Deputy CIO sees rising appeal of private debt for insurers

Elevated rates and recent regulations make private debt an attractive option for insurers seeking diversification and high returns, the senior executive said at the Insurance Investment Briefing in Hong Kong.
FTLife Deputy CIO sees rising appeal of private debt for insurers

Incoming regulatory changes and fundamental shifts in the market are making private debt  increasingly attractive for insurers, according to Carol Mo, the insurer’s deputy chief investment officer.

"The implementation of RBC [Risk-Based Capital] regulation actually makes direct lending or private debt very attractive compared to the old days," Mo said at a panel discussion at AsianInvestor’s Insurance Investment Briefing on March 19.

Under the new RBC regulations—which is expected to come into effect in Hong Kong in the second half of 2024— private debt assets will not require as much capital to be held in reserve by financial institutions as other riskier investments which will greatly enhance their appeal, explained Mo.

Carol Mo,
FTLife Insurance

The capital market’s fundamental shift to a higher interest rate environment will also have a positive impact on the desired investment returns for these assets.

"Around five years ago, if we bought a senior secured lending fund, the return would only be around 4% to 6%, which is below our requirements. However, nowadays with the higher risk-free rates, the same asset gives us around an 8% return, which is very attractive," said Mo.

Market dynamics are also creating opportunities in secondary assets, she said.

"We see very attractive investment opportunities in the secondaries market, be it private credit secondaries or private equity secondaries, because we have seen a wider discount to net asset value (NAV) recently due to the increase in supply and the denominator effect as the interest rate increases."


Private debt is typically extended to high-quality businesses, often backed by private equity, which offers a layer of security to the lender, according to Fred Nada, a partner at private debt investment specialist Arcmont Asset Management.

“Private debt instruments such as loans are primarily issued with variable interest rates, which adjust with inflation, providing a degree of protection for investors in fluctuating economic conditions,” Nada told AsianInvestor’s audience.

Fred Nada,
Arcmont Asset Management

The asset class also appeals to investors because it generates immediate cash flow, which can be particularly attractive in a low-yield environment, he said.

"It’s cash pay. You have a fee that is charged upfront that goes to the investor. And then you have a quarterly coupon, which again, goes to the investors," said Nada.

Citing his own firm’s knowledge of its borrowers, Nada contrasted private debt with the liquid high-yield market.

"Before we do a loan, we know the business really well, we know the management really well, we know the shareholder really well," he said.  

This deep understanding allows for a more informed investment decision and an "illiquidity premium," referring to the prospect of potentially higher returns for reduced liquidity.

Private debt also has an advantage in that gives the investor the ability to intervene if a business does not perform as expected, as opposed to the liquid market where such control is not possible.

"We can protect the downside if things don't go according to plan," said Nada.


Despite the opportunities, FTLife’s Mo acknowledged some key challenges faced by insurers when evaluating private asset classes.

“The first one is currency hedging—we always prefer investing in private debt securities that include currency hedging from the outset and maintain this protection for the entire duration of the investment. Th is what an insurance company [needs] to safeguard against potential losses due to exchange rate fluctuations,” said Mo.

Another challenge is the "valuation" of private assets, which can be a complex task given the rapid movements in capital markets.

"Our auditors frequently ask us whether we consider the NAV provided by the general partner (GP) to be fair, especially since capital markets, including stock and interest rate markets, are extremely volatile."

To address this, the team at FT Life has developed a mechanism to verify the NAV figures given by a GP, she said.

“This same mechanism also assists us in assessing assets, particularly when evaluating a fund that already contains these assets, which, in turn, helps in our overall valuation process."

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