Life insurers weigh in on potential overheating in private credit
Private credit has grown into a multitrillion-dollar market, drawing a diverse range of investors, with the higher-for-longer interest rate environment enhancing its appeal. However, this rapid expansion has also raised concerns about potential risks and market overvaluation.
Churchill Asset Management
Gene Miao, senior investment strategist at Churchill Asset Management, which manages approximately $50 billion in assets, shared his nuanced view on the private credit landscape, at AsianInvestor’s 15th Insurance Investment Briefing in Hong Kong earlier this month.
"We focus on direct lending, a space historically dominated by banks in the US, but banks have moved away over the last 30 years. Now, alternative asset managers like us do buyout financing and leverage lending," Miao told the panel.
"This structural opportunity will continue to grow, and the providers of capital are likely to concentrate down."
While acknowledging concerns about potential overheating, Miao does not believe the overall market is in bubble territory. However, he does recognize some potential pitfalls.
"I think to some extent, there are private credit managers or 'alternative' managers who are essentially just buying what's available, almost like managed ETFs, yet getting paid as if they were true private alternative managers," he said.
He underscores the importance of due diligence, advising investors to "see whether a manager is actually originating their own paper rather than just buying from other sources."
Despite these concerns, Miao remains optimistic about the overall trajectory of the private credit market.
"While there may be pockets of overheating within subsectors, the overall trend and direction seem clear and sustainable," said Miao.
MANAGER SELECTION IS KEY
Dennis Luk, chief investment officer of YF Life, which manages around $10 billion in assets, cautioned against the fixation that private credit market may be forming a bubble.
"It's actually quite dangerous to think too much about whether the market is overheated. You can easily overthink things— for example you might have thought the US equity market was too hot a few years back, but it continued to rise,” Luk told AsianInvestor’s audience.
YF Life
“As an asset allocator, it's important to understand the market, adjust exposures, and try to be prepared, but it's really difficult to evaluate whether something is truly overheated."
With traditional banks becoming increasingly selective in their lending practices, potentially channelling riskier opportunities towards private credit providers, Luk emphasised the increasing significance of careful manager selection for insurers.
"The key is to find the right managers, stay allocated, and stay invested," Luk said.
Luk's perspective aligns with the broader industry trend of insurers increasing their allocations to private credit as they seek yield in a challenging investment environment.
By focusing on manager selection rather than trying to time market cycles, insurers can potentially capitalise on the opportunities in private credit while managing the associated risks.
ORGANISATIONAL ALIGNMENT
Courtney Wei, head of investments at China Life Insurance, which oversees $51 billion in assets, strongly agrees with the importance of manager selection.
China Life
However, she adds another crucial layer to the discussion by highlighting the significance of organisational alignment and team building in navigating the private credit space.
"In an insurance firm, decision-making involves many layers," Wei told the panel.
"If one layer doesn't understand the importance of private market investing, it's hard to move forward."
Finding success in the evolving private credit market goes beyond just selecting the right external managers – it requires cultivating an internal ecosystem that understands and supports these investment decisions. This includes building internal capabilities and expertise in private markets, according to Wei.
"On top of adding people with capability, it's more important to move the whole firm with you. The culture of explaining to the whole firm the trend of private markets and why it's important is crucial. Moving the entire firm with you is very important for building this capability."