06 April 2021
Investec has successfully closed a €1bn ($1.2bn) note program with one of the UK's largest insurers, to invest in capital call financing, Insurance Asset Risk has learnt.
This close brings the total amount of funds raised by Investec for capital call financing across seven blue chip insurance companies in Europe and North America to €3.3bn.
The insurer was not named for competitive considerations, and it did not wish to respond to Insurance Asset Risk's questions.
Capital call loans are investment-grade, short-duration loans, issued to closed-end private capital funds in the investment phase. The loans are secured against the undrawn commitments of the fund's investors.
Neno Raic, global institutional sales at Investec, told Insurance Asset Risk: "Today, it's estimated that about 95% of all closed-end funds that are being raised are using this type of financing, and the market has really grown over the past 10 to 15 years, in line with the fundraising activity growing as well."
With the fundraising numbers increasing over time and fund managers growing in size, Investec realised it would ultimately run out of capacity to continue to provide this type of financing for those borrowers, Raic continued. "So four years ago we went to insurers to present them with this opportunity. They found our story to be very different from that of other banks: we're not there to de-risk our balance sheet or sell them a portion of the existing exposure, we were there to create a partnership and grow with them, providing the financing for the fund managers that were growing in size."
The asset manager thought insurers would be interested in those products, in the context of the current environment of low yields from high-quality credit, rated A and better.
"This particular strategy provides them with 1.5% to 2% returns over EURIBOR (floored at 0%), which for a risk-adjusted return is very attractive compared to anything else that they could see in the public markets," Raic said.
"The main challenge was to create a format that is optimised for Solvency II and, for the UK insurers, matching adjustment-eligible (MA). Initially insurers were never sure of how the capital was going to be treated, particularly being a new asset class that they needed to get their heads around."
Investec was able to get an investment-grade rating with an external credit rating agency for the product. That, in turn, allowed insurers to rely on external ratings to build their own models to allocate it to the strategy and put it in a capital investment-grade return, Raic explained. "For the MA, we had to repack [it] to a note format to make it fit."
"Capital treatment depends on how this is looked at, from an internal or external rating perspective. It's also worth noting that there are a number of formats they can use to participate: long format, note format, rated, unrated [and so on]" he said. "Depending on their size, insurers tend to start with €100m or €200m mandates, but very quickly that increases. You can expect roughly 1% of the AuM to be allocated to these types of strategy. "
There is a space for small insurers as well, Raic added. "The bigger players will pave the way and create this structure, to make it easily accessible for smaller insurers. I just can't see the future of capital call financing or subscription lines not involving the insurance market."
Raic added that in the last four years all rating agencies have developed methodologies to rate capital call financing.
"The reason why we see it growing even further, is if you look at the private equity market, it's been growing at an incredible pace - for the last four years, the private capital market has breached $1trn funds raised each year," Raic said. "The capital call market consists of around 60 banks globally. All of those banks, year after year, are setting new records, but they're increasingly coming up against the limitation on their own balance sheets in terms of how much they can lend to this space. So, the only logical way to do it would be to open it up to the institutional market."