Why the regulator is increasing its scrutiny on private credit
As low yields drive insurers towards private credit, Ed Palmer, EMEA Chief Investment Officer at Metlife, explains why the regulator is looking carefully at this asset classes
Sara Benwellposted on Tuesday, December 10, 2019
"We are all aware that there has been rapid growth in the private credit asset class in recent years," said Ed Palmer, MEA Chief Investment Officer, at Metlife.
He continued: "Rates have been one of the drivers for this and they have remained at a very low level today and there doesn’t seem to be any catalyst for them to increase so we are expecting this asset class to continue to be attractive and to grow."
He was speaking to an audience of insurance investors at a the Insurance Asset Management Summit in London.
"We are expecting this asset class to continue to be attractive and to grow."
He argued that markets have clearly evolved a great deal since the crisis and they now present quite a diverse range of assets and risks. As a result, the regulator is starting to sit up and take notice.
He said: "The growth has caught the eye of the regulator, particularly the PRA who has been making references to prudent levels and what is the prudent level of illiquidity in a given portfolio that makes sense for an individual insurer to have.
"In this context, the structural changes that have taken place in the public markets since the financial crisis are particularly relevant, which is to say, how liquid are your liquid assets?"
"The growth has caught the eye of the regulator, particularly the PRA"
Another risk factor, according to Palmer is that lots of insurers have been showing a greater interest in a relatively small pool of assets.
He explained: "This can create some issues because as insurers we are quite particular in what we are looking for and we like assets that have specific characteristics.
"If there is a lot of demand for an asset that has these particular characteristics it can sometimes cause concerns around the price and making sure that the risk reward balance remains as it should."
Another hot topic for the regulator is making sure that investors have specific expertise in this asset class.
Palmer explained: "Not all assets are created equal, and some of these assets are quite different to your typical plain vanilla corporate credit.
"Not all assets are created equal"
"This is particularly true of some of the infrastructure assets which can be quite similar to project finance and require detailed credit analysis and a certain level of expertise that not everyone has in house and so some insurers might need to rely on external managers.
"With the level of documentation and scenario analysis that is involved in some of these types of assets this is an area which has caught the regulator's eye and I suspect is an area that they will continue to focus on."