Private Assets Moving Centre Stage

The latest Insurance Investment Exchange roundtable, hosted by Schroders, heard how private assets have grown importance, although it has been a gradual, cautious trend.

There was a deep and wide-ranging discussion around the changing face and challenges of the private assets portfolios for insurers. In particular, the guests explored whether this was just a passing phase or a long-term structural shift in approach driven by the search for yield. The evidence suggests that when the portfolio objective is return-seeking then the right mix of private assets can become core elements.

This focus on objectives is key as the insurance industry is now starting to think of the portfolio and how that meets keys goals, not just the individual opportunities – no matter how attractive they may be in the short-term. This shift in approach is not without its complications as adding in the constraints and needs of the firm’s liabilities can lead to configurations and outcomes that can appear counter-intuitive.

Other key challenges are also emerging, notably the need to appreciate that building out a fully invested portfolio is a multi-year process. That can lead to both divergences in terms of anticipated return from the strategic asset allocation versus reality, and lengthen the liquidation profile of the portfolio, as capital is called contractually in future years and new investments made. We have started on the road to complexity, and as an industry, are slowly learning to read the signposts.

Keeping regulators onside is also essential as they have a keen eye for illiquidity threats and want internal models to have a more granular view of risk in portfolios. This is not an insurmountable challenge as the Solvency II framework is flexible enough to cope with most illiquid assets, although there is a need to ensure that they are properly modelled in stress test scenarios. There is plenty of debate in the industry about how far this can be quantitative rather than just based on qualitative judgements.

The challenges faced in designing the optimal private assets insurance portfolio often start with insurers’ own lack of expertise and experience of the assets on offer and are further complicated by the origination constraints. This brings the role of asset managers as partners in the gradual shift towards embracing private assets into focus.