Varagon Capital Partners has received a significant capital infusion from Aflac through a new partnership in which the Columbus, Georgia-based insurer will take a “significant minority stake” in the credit manager and gain additional exposure to mid-market loans.
Aflac made a multiyear $3 billion commitment to New York-based Varagon, roughly one-third of its almost $9 billion investment portfolio.
“The capital is structured in a way that allows us to be patient and maintain discipline based on how we think about deployment,” Varagon chief executive Walter Owens told Private Debt Investor. “The investment philosophy of Aflac aligns with that of AIG and Varagon, which, in a peak market like we’re in today, means being focused on preservation of capital by investing at the top of the capital structure of performing loans.”
Current and former partners at private equity firm Oak Hill Capital Management exited their stake with the sale to Aflac. The insurer will hold an equity stake equal to that of AIG, which is a client and was an anchor investor of Varagon since its 2014 formation.
The Varagon partnership expands Aflac’s private debt exposure significantly. The firm had $2.08 billion of mid-market loans on it books as of 30 September, according to Aflac’s third-quarter earnings report. In addition, it held $447 million of commitments for potential future mid-market lending investments.
“Middle market credit is a strategically important asset class for Aflac, and we are excited to partner with Varagon,” Eric Kirsch, an executive vice-president and global chief investment officer at Aflac and president of Aflac Global Investments, said in a statement.
In March 2017, the insurer announced a partnership with NXT Capital in which the Chicago-based credit manager would manage a $500 million portfolio of mid-market loans, which was financed out of Aflac’s Japan general account.
In January 2018, Aflac expanded its investment portfolio with NXT, in which the former funded the latter with an up to $2 billion portfolio of floating-rate first mortgages for US mid-market commercial properties. The firm currently has $1.39 billion of commercial mortgage loans on its books, the third-quarter earnings figures showed.
That Aflac is dedicating more resources to private debt isn’t surprising; a Natixis survey of insurance companies revealed that 73 percent of respondents cited the low interest rate environment as one of their top portfolio risks in 2020, and as a result of that environment, 93 percent worry about low returns. In addition, 53 percent said they are increasingly turning to alternatives as a replacement for fixed income.
“Insurance capital is typically long-term and relative-value focused, which allows a direct lender to play a defensive strategy throughout the cycle,” Owens said, explaining the benefit of insurers’ ability to seek returns throughout the capital structure.
“The firm sees continued signs of aggressive and late-cycle market conditions, though Varagon is still seeing quality dealflow from strong middle market sponsors,” said Kevin Marchetti, Varagon’s head of underwriting and portfolio management. “Varagon’s pipeline remains strong within the performing, middle-market sponsor-backed strategy that we execute on. The existing portfolio performance continues to be strong.”