Spreads ‘almost the tightest they’ve ever been’

Brian Olvany is head of private debt at Zurich Insurance Group. The investment management function within the insurer manages approximately $200bn in assets of which over $8bn is targeted at private debt assets. We catch up with him to get his take on private debt markets today.

How did private debt perform against internal benchmarks over the past 12 months?

The rationale for Zurich to invest in private debt is to take advantage of the illiquid nature of our liabilities and therefore our view of performance is mainly focused on ensuring that we earn an illiquidity premium. In order to determine whether we are earning an illiquidity premium or excess spread we view the returns offered by private debt asset classes from both a short and long-term perspective.

The short-term perspective involves comparing private debt spreads against relevant public benchmarks adjusted for risk and duration as necessary. From a long-term perspective, we analyse the return using a spread decomposition model that uses current and long-term historical data to determine whether the asset class offers compensation in excess of what is required for expected and unexpected losses. From these two perspectives, we are satisfied with the performance of our portfolio.

How confident do you feel about the performance of the asset class over the next 12 months as opposed to the last?

Our view on spreads generally is that we expect them to remain range bound over the next 12 months, but with risks tilted to the downside. We think that upside in credit markets is rather limited at this point, given tight spread levels. In fact, on a quality adjusted basis, spreads are almost the tightest they have ever been. Despite this, there is still a strong search for yield given the fact that central banks are still accommodative which is why we are not outrightly negative on credit.

In regard to private debt, significant fundraising continues in most private debt asset classes and therefore we expect competition for assets to continue and spreads to remain under pressure.

As the credit cycle continues to age we find comfort in the fact that many private debt asset classes still provide extra protection in the form of liens on collateral or financial covenants which will prove beneficial when the cycle finally turns.

Over the past 12 months, how easy has it been to source investment opportunities in private debt?

Private debt within Zurich’s process has a separate allocation of approximately 5 percent. There is capacity to continue to increase the allocation, but ultimately we will be constrained by the liquidity of our liabilities. Since Zurich has both life and general insurance companies located throughout Europe, North America, Latin America and Asia we have access to a diverse set of funding sources. As a result, we are able to invest in private debt assets in a wide variety of currencies, geographies and durations and are not reliant on any one area to achieve our ramp-up targets.

Therefore, despite operating in a regulated environment and increasing competition for assets, we have been able to grow our private debt portfolio at a quick, but prudent pace with the expectation of similar growth in the future as long as the risk/return dynamic remains favourable.