‘The tilt within the general account’s fixed income portfolio over the last five years has been towards private markets,” says Emilia Wiener, managing director and head of fixed income/general account organisation at TIAA, the New York-based insurance giant. “These markets offer attractive yield premiums relative to public markets for comparable credit risks.”

With a private debt allocation of almost $90 billion, TIAA is the table-topper in our Global Investor 30 ranking, allowing it to claim the title of private debt’s most influential limited partner.

Within the organisation, Wiener is a key figure in how the capital from the firm’s $280 billion general account gets allocated. She is head of the fixed income portfolio, which makes up around 75-80 percent of the general account’s total capital.

“My work involves establishing and executing investment strategy, looking not just at asset classes we already have exposure to but also new strategies that we could introduce,” says Wiener.

Heavy lifting

“The general account is a very large and diversified portfolio but works closely with TIAA’s asset manager Nuveen and its affiliates, such as Churchill Asset Management, to find new pockets of opportunity.”

Wiener is tasked with drawing up guidelines regarding how the organisation should go about achieving its portfolio goals, including in relation to risk appetite, capital preservation and managing downside risk. In sum, it’s about how the capital can be allocated in the most optimal manner possible.

Wiener points out that the portfolio’s “heavy lifting and market-facing activity” is done by Nuveen and its affiliates, and she “works closely” with them, “ensuring that the strategies are implemented and successfully rolled out”.

The fixed income portfolio covers areas such as the public corporate market, municipal bonds and structured finance. When it comes to private credit, much of the organisation’s exposure to the corporate mid-market comes from Churchill Asset Management, the New York-based Nuveen affiliate, which is active in areas such as direct lending, business development companies and collateralised loan obligations. The portfolio also takes in areas such as private placement, project finance and private asset-backed securities.

“TIAA has been involved in the private credit market for ages, both investment grade and non-investment grade, and has always been viewed as a strong credit shop,” says Wiener. “I competed for transactions with TIAA for years and now I get to appreciate their strengths from the same side of the table. The team is very creative in structuring transactions and, increasingly, directly originating deals for the portfolio. The private credit portfolio has grown very nicely.”

Covenant comfort

One of the features that Wiener particularly likes about private credit is the defensive nature of the asset class, which derives from the inclusion of covenants in the deal documents that are designed to protect downside risk. “We are long-term investors and covenants allow investors to come in to re-strike risk-return bargains when and if an issuer comes under stress. On the public side, you generally don’t have these same levers.”

She adds that the lack of liquidity in private markets is not too much of a concern for the general account. “You get the premium because most investors are focused on maintaining liquidity in their fixed income portfolios. But we have ample liquidity so we’re actually very happy to allocate to private credit and capture this premium.”

But while Wiener sees covenants as a major plus, other market observers have questioned their usefulness – pointing out that the number of covenants has reduced overall, while the ability to enforce them in a meaningful way has also lessened. Wiener is not so sceptical.

“One thing to note is that covenant negotiations reflect the dynamics of the market at the time. In the immediate post-covid environment, the dynamics swung in favour of the lender. With the passage of time, and the benefit of massive policy actions, things have rebalanced. Long-term performance in private credit really comes down to understanding these market dynamics, structuring discipline and the quality of your underwriting.”

When TIAA first began allocating to private credit, the intention was to gain exposure across the capital structure with senior and junior debt programmes. Over time, it has also participated in the BDC market as well as CLOs. In the latter, the organisation began investing into the equity when risk retention rules were brought into the US market. In the structured space, “risk retention is no longer a requirement for the US, but we continue to invest in and support the CLO origination platforms that have been built by our affiliated asset managers because performance has been good. It’s not a large exposure in the context of our entire general account, but I continue to look at the potential there”.

Project finance is another area of interest for Wiener with the US’s $1 trillion infrastructure bill expected to result in significantly increased expenditure. “There should be opportunities to build more of a presence in that market,” she acknowledges.

When it comes to assessing current market conditions in private credit, Wiener is relatively sanguine despite all the talk about inflation bringing a challenging new environment.

“My experience tells me investors can get out the other side of credit cycles with manageable outcomes as long as you make the right decisions going in and you stay vigilant to developing trends. We’re heading into a difficult situation now with supply chain challenges. The pandemic was a top-line problem which has now evolved into a supply chain problem leading to cost issues for borrowers.

“People need to stay vigilant in the face of these changes and retain the flexibility to pivot to invest elsewhere when certain areas get overheated. We rely on our affiliated asset managers to guide us through that.”

Wiener also makes the point that, in her view, private credit hasn’t been fully tested through a credit cycle for many years. During the crisis of 2008 and then again during the pandemic, “markets were cushioned by policy actions”. But it’s important to note that underwriting remains as important as ever. “You can’t underwrite assuming that policy actions in a stressed environment will bail you out.”

In common with countless other LPs, TIAA is spending a lot of time thinking about how best to respond to environmental, social and governance issues. “ESG and climate change will keep growing as a conversation,” says Wiener. “Part of that will be getting better data, tools and disclosure from managers and there will be a lot of focus on that in the future.”