In our view, private debt backed by real assets is an asset class with a particularly attractive risk/return profile for insurance companies. This is apparent from interest in the asset class.
In 2017, the number of private debt funds set a record with 324 funds worldwide (+12%) and total commitment of USD 153 billion (private debt includes infrastructure, real-estate and corporate debt).
Institutional investors are turning towards private debt backed by real assets, particularly infrastructure and real-estate debt, as it meets their needs for returns in line with their liability structures and portfolio diversification.
Private debt on real assets offers stable and predictable returns, along with well-controlled risk. These features are based on the very nature of the underlying assets. Real estate features stable assets with sustainable value, while infrastructure offers regulated rates, strong resilience to economic cycles, and high barriers to entry.
Senior debt backed by real assets offers insurance companies a favourable solvency capital ratio (SCR), close to a bond rated “A/A-”. The SCR coefficient on senior real-estate debt is half as high as a non-rated corporate bond. Likewise, senior infrastructure debt offers an SCR that is 30% lower than investment-grade corporate bonds.
At equivalent credit risk, senior debt backed by real assets offers spreads of about Euribor + 2.0%, compared to Euribor + 0.4% for an investment-grade corporate bond. As a result, senior debt funds backed by real assets achieve better regulatory return on equity.
By way of illustration, senior infrastructure debt could obtain a risk-adjusted Solvency II (SII) return on equity of 15.5% and investment-grade bonds, 2.2%. Similarly, senior real-estate debt would obtain a risk-adjusted SII return of 23.4%, compared to 2.5% for BBB-rated corporate bonds.
Diversified real-estate or infrastructure debt helps keep SCR consumption low and leads to better risk-adjusted returns. These assets also help to manage long durations advantageously, thanks to steady and predictable cash flows, and offer an attractive liquidity premium. All this makes them highly sought out by insurance companies. Given the growing number of active strategies on the market, investors may also add differentiating criteria, such as the ability to rapidly deploy capital, access to an origination platform, and consideration of ESG criteria.
 Subject to eligibility and dependent on a loan-to-value ratio (the borrowed amount divided by the value of the financed asset) below 75%
 Source: Bloomberg, as of 31/12/2017, Median ZSpread for 5-10-year European non-financial bonds rated BBB+ to BBB-
 Risk-adjusted returns divided by the SII SCR spread
 Source: BNPP AM, Bloomberg, S&P LCD, Moody’s, as of June 2017