‘The challenge is capital constraints’

Does investing from the insurance side come with any special characteristics?

Yes, it does. I think what you see from Nationwide’s perspective, at least, is a very stable participant in the market. We are not in the market for one year, then out the next. We have been very programmatic in terms of how we commit capital and the types of the firms we commit capital to.

The challenge is that we have capital constraints, because we are regulated by various insurance regulators, and we have considerations around our credit rating. That rating is something we depend on to sell our underlying insurance products. The quality of our portfolio has to be very strong.

What makes debt an attractive asset class for insurance lenders?

I think private debt provides natural diversification. What I have found is that the underlying mid-market companies we tend to get exposure to through fund investments, mostly private equity-owned portfolio companies, tend to have a very different financial profile relative to our traditional, large investment-grade fixed income issuers. There is a lot of value in that for us.

It’s been a long time since we have had a credit downturn, so how these mid-market companies perform through a cycle will be a new experience for many institutional investors, but the levers they have to pull in a downturn are different and the outcomes in a downturn should be expected to be different as well.

From a return perspective, we appreciate the floating rate as a complement to our longer-duration investments. The ability to monetise our illiquid assets and use the firm’s resident credit skills to generate incremental returns available for underwriting more complex investments is valuable.

A lot of mid-market companies tend to exhibit very strong free cashflow because they are asset-light and as a result can be less capital intensive. They can have highly variable cost structures and are owned by private equity sponsors, many of which have an operating mentality. That is different from 90 percent of the larger book of investments that we manage.

Many credit firms have started creating insurance lending-focused units. What do you think of that?

The largest asset managers, the KKRs, the Apollos and the Goldman Sachs of the world, they like the insurance company space because of the stability of capital that is available to be outsourced to firms that have investment capabilities that we do not currently have in-house. Every dollar on our balance sheet is available for some form of investment… there is no real leverage, that’s why they call it “real money”.

So, our commitments tend to be very stable over time, but we are also pretty finicky, and there are capital considerations given to all of our investments. Insurance specialists tend to have good insight into how we can best invest in these markets efficiently regarding the capital treatment of the commitments we make. Larger asset managers have been making investments in people and resources, which is extremely helpful for us.

It’s almost like software, you know, you make it once and sell it hopefully a bunch of times. I think that function is very well placed with these large asset managers which have the intellectual capital to design new investment products and also have the distribution capabilities to provide insurance specific investment products as solutions to numerous insurance companies. That scale can drive down structuring costs and increase returns. We value that.