Goldman insurance survey latest to show LPs’ drift to private debt

Real asset debt and corporate loans were among the favourites of insurers, outpacing real asset equity strategies, hedge funds and public securities for planned allocation increases.

The rush to private credit is continuing among insurance companies, as these institutional investors are convinced we are in the late stages of the credit cycle, according to a new survey from Goldman Sachs.

Four of the top five strategies that insurers planned to allocate more to were credit strategies.

While private equity saw the biggest expected net increase in the next 12 months (32 percent), second and third places went to infrastructure debt and commercial mortgage loans, which had anticipated net increases of 27 percent and 22 percent, respectively. Mid-market corporate loans and collateralised loan obligations took fourth and fifth places, with forecasted net increases of 21 percent and 17 percent.

“The takeaway from the survey is that [insurance companies] are going to private credit in multiple forms,” said Matthew Armas, the global head of insurance fixed income portfolio management at Goldman Sachs Asset Management (GSAM). He pointed toward the “continued allocation” to infrastructure debt and real estate debt, as well as corporate loans, both in investment-grade businesses and mid-market companies.

“They are looking for increased protection, and mid-market loans would fit the bill,” he continued. “What we’ve seen in the broadly-syndicated bank loan market is an increase in the number of covenant-lite loans; in the private loan market, the terms of our lending arrangements are holding [up] better.”

The findings are hardly unique. Numbers from a BlackRock poll of 230 institutional clients released in January found similar results.

“Insurers continue to seek alternative sources of income by increasing allocations to illiquid assets and credit strategies,” the firm wrote among its key observations from the study.

Some 72 percent of insurance respondents in the survey by the world’s largest asset manager indicated intentions to increase their allocation to private credit either slightly (by 1-5 percent) or significantly (by more than 5 percent). Similarly, 41 percent of insurance companies planned to slightly up their commitments to securitised assets.

The survey covered a broad array of insurance institutions across the globe. Respondents included more than 300 companies with more than $13 trillion in combined balance sheet assets, which is representative of more than half of such capital globally, said Michael Siegel, the global head of insurance asset management within GSAM.

“There were two dramatic shifts in the survey results: there was greater concern about where we are in the credit cycle and the respondents think we are later in the credit cycle. We haven’t seen them exiting the private [markets],” Siegel said, emphasising that the continued shift to private debt is notable because insurance assets are heavily allocated to fixed income investments.

This was partially illustrated by the large spike in the number of respondents that said the credit cycle has resulted in late-stage deteriorating credit quality. Some 85 percent of participating insurers said so, while only 34 percent last year agreed with that sentiment. Last year, a majority (60 percent) said there was middle-stage, stable credit quality.

When it comes to credit spreads, 52 percent said they expect those figures to moderately widen, with another 44 percent saying they would modestly tighten to modestly widen. In 2018, those figures were 29 percent and 54 percent, respectively.

When it comes to performance, the insurers were largely optimistic about mid-market loans. Some 13 percent anticipated those securities to be the highest-returning strategy, while 5 percent thought it would be the lowest-returning one.

“Insurance companies are not generally total return players,” Siegel said. “They just need good performance. Even if they think that equities are going to outperform fixed income, they’re still going to make a large allocation to fixed income.”