The relationship between insurance and private debt, which has always been close and is getting closer, is one we examine in this month’s cover story. One vital aspect of that relationship is regulation, since policymakers have placed significant constraints on insurers, which can impact the way they are able to build their portfolios. This has often acted as a barrier to private markets commitments.
There were initial concerns that private debt would struggle to meet these needs, particularly in Europe, where insurers are governed by Solvency II regulation. Perhaps the biggest worry was that insurers would not be able to apply a “look through” on funds, which is a requirement to “know your assets”, whether those assets are held directly or indirectly through collective investment vehicles. It effectively means the ability to form a deep understanding of portfolio exposure and risk profiles.
The “look through” fears are increasingly being eased, but in an effort to try and make private debt funds fit their regulatory needs, some insurers initially got creative. German insurers, for example, often gained exposure through parallel feeder funds, while others went down the separately managed account route where they could participate directly in deals alongside a pooled fund investor.
Moreover, it is not only Europe where regulation has been a pressing issue. While Solvency II does not extend outside Europe, insurers in other regions often face similar restrictions on the way they invest, meaning that private debt managers need to ensure their funds can deliver on the needs of investors in many different markets.
“Larger investors in general are demanding a lot more reporting and these kinds of rules are not just limited to Europe,” Ajay Pathak, a partner in law firm Goodwin’s private equity group told us. “Increasingly the US has risk-based capital rules and in parts of Asia too. For example, Korean insurers have requirements that are similar to Solvency II.”
But while it is recognised that insurers need to operate within what one market source neatly described as “guardrails”, there is little chance that either insurers or private debt funds will conclude that meeting each other’s demands is too much trouble. To insurers, private debt spells relatively safe yield at a time of very low interest rates and tight spreads. For private debt managers, insurers mean a reliable and possibly permanent source of capital.
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