Loan Note: The new relationships between insurance and private debt; Golub notes inflation threat

Download our latest issue, which explores the relationship between insurance and private debt and has a special section devoted to real estate finance. Plus, why a Golub survey raises inflation concerns and the reporting requirements that CLO managers need to know about. Here's today's brief for our valued subscribers only.

They said it

“We have not changed our approach entirely and have been still selectively investing in private debt, although there is no denying we would prefer a more stable and predictable environment”

Tsutomo Ishida, deputy general manager at Tokio Marine & Nichido Fire Insurance, speaking to Private Debt Investor in an article exploring Asian insurers’ current views of the asset class (see here)

First Look

Insurance the focus in this month’s issue 
Apollo Global Management/Athene, Adams Street Partners/American Equity Investment Life Insurance and Blackstone Group/Allstate: all examples of partnerships formed over the last year between organisations with private debt operations and insurance companies. There are numerous other examples that we explore in this month’s Deep Dive.

For insurers, private debt is an increasingly important element in their search for relatively safe yielding investments. For private debt managers, insurers represent the holy grail of permanent capital. That’s what makes it a marriage made in heaven. But, as with every marriage, there’s the odd challenge to work through – in this case, in the form of regulation. Our Deep Dive takes a look at the tightly governed parameters within which insurance companies must operate.

Also in this month’s issue – which can be accessed here – we have 18 pages dedicated to real estate debt. In this section you will find out why real estate has retained its allure despite the pandemic, the trends shaping its present and future, and our affiliate title PERE’s ranking of the 50 largest real estate debt managers.

Inflation concern as mid-market booms 
“We’ve seen a boom building and the boom is here.” These are the words of Lawrence Golub, chief executive of fund manager Golub Capital, speaking about the rapid growth of mid-market private companies in the early months of this year (see article here).

The Golub Capital Altman Index, while providing welcome signs of recovery from the pandemic, also expressed concern about inflation, describing fiscal and monetary stimulus in the US as creating “very substantial risks”. Golub notes that “our current fiscal and monetary policy is not logically, quantitatively linked to the observable output gap”.

Meanwhile, affiliate title Private Equity International notes that Australia’s Future Fund is taking drastic steps to prepare for the possibility of a significant rise in inflation. The A$179 billion ($139 billion; €114 billion) sovereign wealth fund plans to hire 150 additional staff, including 70 investment professionals, in Melbourne to brace for a more challenging returns environment. The move would nearly double its existing 80-strong investment team.

CLOs face reporting challenge 
Collateralised loan obligation managers have found themselves with a bigger reporting challenge on their hands in the wake of the pandemic, but may not know exactly how to go about rising to it.

European regulation required all European CLOs and warehouses issued from 2019 onwards to undertake “ad hoc” reporting should a “significant event” occur. The requirement was triggered by the pandemic in Q2 2020, but as the European Leveraged Finance Association has discovered, “the scope of the reporting obligation is unclear and there is not yet any market consistency”.

In an effort to shed light on the parameters of the reporting requirement and the things CLO managers should be considering, ELFA has produced a paper (see here) that is well worth a read.

Data snapshot

Distressed investors waiting for the wave. Our data shows that 2017 and 2019 were prime years for distressed debt fundraising. But with the pandemic thus far failing to deliver the scale of opportunity that some were no doubt hoping for, managers are having to be flexible in how they deploy capital (see our feature on the topic here).

Essentials

Leveraged loans take off
The European leveraged loan market sprang to life in the first quarter, according to a report from the Association for Financial Markets in Europe. Leveraged loans – including first lien, second lien and mezzanine financing – totalled €66.1 billion and 143 deals in Q1, compared with €28.5 billion and 100 deals in Q4 2020. Refinancing and repayment of debt accounted for €44.4 billion of the total. The vast majority of deals (97 percent) were covenant-lite.

Default rate tumbles in structured finance
The annual default rate in the global structured finance market fell to 1.4 percent last year, its lowest level since 2009, according to S&P Global Ratings (report behind paywall here). S&P said it had lowered 7.6 percent of its global structured finance ratings last year, with commercial mortgage-backed securities hit hardest by covid, while 3.7 percent of ratings were raised.

What’s going on in North Asia? 
Virtual fundraising is “coming on strong” in North Asian alternative investments, according to James Ford, a partner at Allen & Overy. Ford has teamed up with the law firm’s counsel Kamar Jaffer to explore opportunities and market trends in the region in a podcast that covers areas such as the Hong Kong limited partnership regime, regulatory reforms under consideration and developments in the secondaries space. Well worth a listen here.

LP watch

Institution: Montana Board of Investments
Headquarters: Helena, US
AUM: $23.04bn
Allocation to alternatives: 17.05%

Montana Board of Investments committed $50 million to CapitalSpring Investment Partners VI, according to the organisation’s June investment board meeting document.

MBOI previously committed $40 million to the fund’s predecessor, CapitalSpring Investment Partners V, which held a final close at $725 million in August 2017, exceeding its $500 million target.

MBOI’s recent private debt commitments have primarily been focused on North America in the real estate and corporate sectors. Private investments, which include both private equity and private debt, constitute 7.6 percent of MBOI’s entire investment portfolio.

Institution: Fubon Hyundai Life Insurance
Headquarters: Seoul, South Korea
AUM: 17.8trn Korean won
Allocation to alternatives: 6.4%

Fubon Hyundai Life Insurance has agreed to commit $40 million to Koramco US Debt Strategy Private Real Estate Investment Trust No.18-2. The fund is managed by KORAMCO Asset Management. It is the first time the South Korean insurance company has invested in a private debt fund.


Today’s letter was prepared by Andy Thomson with John Bakie and Robin Blumenthal