Private credit a growing market, PE valuations hit by corrections: NTUC Income CIO

Private assets have proven effective during times of high inflation and rising interest rates, particularly for long-term investors, leading Singapore’s NTUC Income to stick with its continued allocation to private assets.

The insurance cooperative expects the Federal Reserve to hike rates to 3.5% by the end of the year and that the US recession is likely to be a mild one.

“The US has registered two consecutive quarters of negative GDP, signalling that the country is in a technical recession. However, a full-blown recession is not imminent until 2023,” Mark Shi, chief investment officer at NTUC Income told AsianInvestor.

“We are of the view that it is likely to be a mild one as we do not expect the Fed to be too aggressive in hiking interest rates to drive a steep recession,” he said.

He added that headline inflation should “fall on the back of falling commodities and energy prices and easing of supply chain bottlenecks”. Core inflation, however, which is less volatile, may “remain elevated near-term but likely to gradually fall over the medium term in 2023 and 2024,” he said.

The insurer has more than 20% allocated to private and alternative assets including real estate, private equity and private credit, he said. While the firm will remain defensive on interest rates and equities as it keeps a wary eye on inflation, the long-term trend of its allocation to private assets is unlikely to be affected by the ebbs and flows of inflation and interest rates.

“Our allocation in private assets is a long-term strategic move. With returns spanning over multiple years, these private assets provide long-term returns which match the required returns for our long-dated insurance liabilities. These assets are illiquid in nature, and therefore help reduce the mark-to-market volatility of Income’s overall portfolio,” Shi said.

Drilling down into the asset classes, Shi said that Income “sees private credit as a growing market in the long term, with fund managers taking over some of the funding roles traditionally provided by banks.”

Private credit also has the uncanny ability to be resilient through changing interest rates and provide a stable source of income. “Private credit cash flows are floating rates and offer higher coupons than investment grade credit... Just like any other public market portfolios where diversification is important, we diversify our portfolios in these private assets in terms of geographical exposure, strategy and vintage,” he said.

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He added that market dislocations historically indicate good vintage years for private assets as general partners (GPs) take advantage of the dislocation to source attractive deals.

Income views private investments as a long-term strategic move, he said, adding that recent corrections in equities are likely to filter into the valuation of PE over the next few quarters.

The insurer also allocates to real estate in Singapore and in funds globally. “Real estate typically appreciates in the long term and is a good asset class in hedging against inflation,” he said.

In January, NTUC Income announced that it would corporatise its legal form, which entails the transfer of its insurance business and assets to a new company. Shi said that the move would not affect its investment strategy.

“Our investment approach and asset allocation framework have always been aligned with the industry’s best practices. The investment horizon, risk profile and target returns are derived from the requirements to support our insurance policies which will not change due to the corporatisation exercise,” he said.

Additional reporting by Edward Tang

Find out more from senior investment professionals at the Insurance Investment Briefing Southeast Asia in Singapore on September 23.