Insurers predict higher returns from private credit than private equity
Insurers expect private credit to be one of the asset classes that delivers the highest returns over the next 12 months, beating private equity for the first time.
A new survey from Goldman Sachs Asset Management asked insurers to select the top five asset classes they expect to have the highest total return over the next 12 months.
53 per cent of respondents cited private credit, while 46 per cent said US equities. Just 31 per cent placed private equity in their top five.
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“Last year became a fixed income renaissance as insurers renewed interest in the asset class,” said Matt Armas, global head of insurance at Goldmans Sachs Asset Management.
“This year they report taking a risk-on approach and favouring high quality fixed income assets and private credit, which can offer incremental income enhancement, diversification benefits, downside risk mitigation, and resilient returns. This has led insurers into an asset allocation sweet spot, but they recognize that they cannot settle into complacency.”
15 per cent of insurers named private credit as their first choice, while 15 per cent opted for US equities. Private equity tied for third place at 10 per cent with government and agency debt.
Despite economic uncertainty, 27 per cent of insurers plan to add risk to their overall portfolios.
“Private credit’s appeal to insurers will endure even as interest rates begin to move lower. Insurance CIOs appreciate the attractive risk-return profile in private credit and the ability of leading managers to source differentiated, risk-mitigated opportunities that can complement their public fixed income exposures,” said Stephanie Rader, co-head of Alternatives Capital Formation, Goldman Sachs Asset Management. “We expect to see continued growth in allocations to private credit from insurers globally.”
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To lock in higher yields, 42 per cent of insurers intend to increase duration risk in 2024. This is the highest level in the survey’s history, up from 38 per cent in 2023. Only five per cent plan to decrease duration.
Over the next year, 35 per cent of insurers expect to increase credit risk in their portfolios, despite 59 per cent expressing concern that the credit cycle is entering a late stage.
“As we near a new rate environment, we expect investment grade corporate credit fundamentals to remain attractive for insurers looking to lock in higher yields,” said Neil Moge, global co-head of insurance portfolio management at Goldman Sachs Asset Management.
“However, tighter spreads create little room for error. Higher-quality, active security selection will be imperative for portfolios looking to find pockets of relative value and manage tail risk appropriately.”
Read more: Goldman Sachs seeks to more than double private credit portfolio
This year, insurers expect cryptocurrencies, real estate equity, and commercial mortgage loans to deliver the lowest returns.
This year’s survey drew insights from 359 chief investment officers and chief finance officers representing more than $13tn (£10.3tn) in balance sheet assets. The survey was conducted in January and February 2024.
It seeks to identify trends in the global insurance industry and highlight top considerations of insurance investment professionals: credit quality concerns, appetite for high-quality yield and investment-grade private assets, and enthusiasm for impact-oriented environmental, social and governance opportunities.