11 July 2022

Future opportunities in private placements

In the third and final part of this Insurance Asset Risk/ Loomis Sayles roundtable, insurers highlight area of opportunities in the private placement space for the months ahead

Attendees:

Colin Dowdall, VP and director of insurance solutions, Loomis Sayles
Chris Gudmastad, managing director for private credit, Loomis Sayles
Nakul Nayyar, head of investment risk, Guardian Life
Andrew Hanson, senior advisor in private capital markets, Moelis & Co
Dmitry Baron, structured finance - senior portfolio manager, Aflac
Sean Collins, VP investment, Prudential
Mary Beth Cadle, head of private placement debt, Nationwide

Chaired by Vincent Huck, editor, Insurance Asset Risk

 

Vincent Huck: Let us talk a little bit about opportunities going forward and where you see the market going. Chris, what are the emerging areas or opportunities in private placement?

Chris Gudmastad: Going back to Andrew's earlier comments on what fueled growth the past decade, it was project finance and recently private ABS, specialty finance and esoteric even more recently. As I look forward, I believe there are a couple of important changes. One, is regulatory and capital changes, where there is less of a cliff for life insurance companies in the US going from BBB to BB. For well-capitalized insurance companies, you will see more interest investing in BB potentially in this space. We are seeing that the quality continuum is getting filled in.

Number two, I have been talking to individuals like Andrew and other bankers about what is the next, let us call it private ABS. Esoteric private ABS may have some time to grow and mature. The next private ABS, if you will, are likely new geographies that you did not typically historically see in the private placement or private equity asset class. I am thinking more frontier and emerging markets and investments that are structured appropriately for the risk. The logical place to start is project finance and infrastructure.

Mary Beth Cadle: What we are hearing about is LATAM, specifically for infrastructure project finance.

Historically, certain geographical regions did not meet our requirements. But some of those countries now seeking capital have stabilized politically, demonstrated strong economic growth and legal protections for creditors have improved. There is a need for infrastructure, and we prefer that sector which has strong government interest. At this point, infra is a more natural place for us to invest than, for instance, a domestic REIT where our knowledge base is more limited.

Nakul Nayyar: What is your historical experience generally in that area in terms of credit performance?

Chris Gudmastad: It really differs by country. Like look at Chile vs Argentina, for example. If you look at investors in the private markets, the natural place to start is Mexico first. Chile and Mexico are generally creditor friendly jurisdictions. Or it is going to be a transaction that is infrastructure-related, or it might be a multinational where jurisdiction may be less important and you are confident that you will not going to have to go through the courts.
From my standpoint, working for multiple insurance companies, there is really no interest in going outside Europe, US, Canada. However, as I look at more sophisticated investors coming into the marketplace, that have an emerging markets team, they can provide the expertise to help underwrite those transactions.

Mary Beth Cadle: And that is what Nationwide Insurance is doing. Over the last 3-4 years, we built a sovereign desk that is investing in emerging markets. We then leverage their country expertise combined with the privates' ability to underwrite the project itself. We couldn't invest in non-traditional jurisdictions without the collaboration.

Sean Collins: We have talked about complexity premium for ABS. There has got to be a complexity premium for going into some of these markets that are maybe less credit-friendly or maybe more uncertain--and if you have expertise in those areas, you can take advantage of that complexity.

Chris Gudmastad: Yes, generally you are getting paid in part because there is a lack investor of demand, so there is a supply-demand imbalance, and that is typically how a new asset class starts within private fixed income. There is an opportunity to generate alpha, at least early on, if you are one of the first investors coming in to, let say, private ABS, and you have that capability.

Same with REITs. There was a time with REITs—it is hard to believe—but the private placement market was not really open to REITs shortly after the crisis. And there was a time where the illiquidity premium on REITs was dramatic and we believe that is now starting to come in.

Mary Beth Cadle: I think you could say the same with the asset manager sector. Because not everyone was comfortable investing in that space, deals were smaller and spreads wider. We still like investing in asset managers but spread compression has definitely occurred over the last year.

Chris Gudmastad: I remember doing one of the first unsecured BDCs (Business Development Companies) post-crisis, and we were probably one of two investors in that transaction, and that is probably five or six years ago. Now, you have 20-plus investors investing in BDCs.

Andrew Hanson: I look back more than a decade ago, where it was not unusual for a private placement insurance investor to say they do not invest in other financial institutions (as well as a few other industries like technology, tobacco, etc). But how has the world changed. Today, if you combine REITs and all financial institutions, it is nearly half of our market. So that has been a huge boom for the issuance statistics—that willingness on the buy side to entertain these new credits.

Public markets think of financial institutions mainly as banks. However, in private placements we see traditional asset managers, alternative asset managers, BDCs, closed end funds, private credit funds, finance companies, leasing companies, brokers, and community banks. It is so broad, which has been great for our marketplace. Some of the buy-side is a little concerned that we are doing a lot in this sector, but our market shifts where the opportunity is, and it does add some new diversification to investment portfolios.

Mary Beth Cadle: In many ways, the asset managers and BDCs, are a diversifier to the availability of banks in the public markets. While issuance has been high, if one looks at a broader corporate credit book, the percentage of total exposure to asset managers and BDCs is less meaningful. Of course, in a downturn, should one be working on stressed credits, the combined book doesn't feel quite so comfortable as in a more benign environment.

Chris Gudmastad: I think you also need to look across alternatives too, because a lot of these assets are typically correlated.

Colin Dowdall: The banks have retrenched to create this opportunity, and we call this large swath of the market fixed income placement, and we believe the next natural place to look for supply- given new entrants, you see asset managers, private equity-backed insurers entering the market, as well as existing participants, is, frankly, taking issuance from the public bond market. It is very logical that you have a significant amount of issuance in that space, and you have ease of execution in the private market, which is potentially more cost effective and easier to match up buyers or investors with issuers. However, even prior to COVID, you were starting to see some large issuers coming to the private market that just were bypassing the public market. That is, frankly, why we are here, as Loomis Sayles approximately $300 billion manager of credit, we believe it is critically important to look at the credit as this continuum because that represents the evolution.