Case study: How Phoenix Group is tackling illiquid investments

Sara Benwell: What prompted your organisation to start investing in illiquids several years ago?

Anand Kwatra: A key driver behind our 2015 move into illiquids was the improved financial and strategic benefits from what were then new and less liquid asset classes.

"Illiquids gradually played an increasingly more important role in helping

the Group meet its sustainability and ESG objectives."

There would be improved diversification delivered from new assets like equity release mortgages to infrastructure, and the additional illiquidity premium would improve yield on the back-book and support our developing proposition in the bulk annuity markets.

There were non-financial benefits as well. For example, illiquids gradually played an increasingly more important role in helping the Group meet its sustainability and ESG objectives, via opportunities in green bonds, social housing lending, and supporting projects in the renewable energy space. This is becoming even more important as we look to build back better and greener.

Sara: When beginning investing in illiquids, what kind of preparation did you need to do first?

Anand: Planning was essential, in terms of agreeing the volumes and benefits required from the investments. This helped with market access, because we could then clearly communicate to market participants and our asset managers what investments we needed to meet our objectives.

"There was a need to prioritise resources to deal with the most

 attractive opportunities."

A new operating model was set up, to ensure there was oversight at all stages of the transaction (from on-boarding to monitoring) from a variety of different functions in the business. This did require changes to the way certain functions operated and increasing collaboration to ensure shared understanding of these new assets.

There was a need to prioritise resources to deal with the most attractive opportunities, as the opportunities in the space are vast and not everything would be a viable investment opportunity.

Sara: How important is illiquids now to the overall investment strategy?

Anand: It is a substantial component of our investment strategy and is no longer just a “niche” activity. Our illiquid operating model is constantly being refined to deal with new circumstances and challenges.

Illiquid investments are a key component of meeting financial targets, our sustainability targets and form a big part of our market disclosures. Effectively, the ask is on the illiquids to now meet many different criteria.

Sara: What challenges did you face along the way and how did you tackle them? Were there any key lessons learnt?

Anand: There were several areas of challenge in this evolving journey:

• Planning – This has been an important lesson to embrace – setting overall deployment targets over a medium term horizon; or planning a programme of activities and resources to on-board a new asset class. In turn, this has increased the importance of collaboration, both internally (with different teams, including our actuaries, our risk and finance functions) and externally with our asset management, bank and sponsor partners to ensure our ambitions are realised.
• Flexibility – The investment approach always needs to be flexible to accommodate changes to ensure we make the best decisions at any point in time. This is because markets constantly evolve and the relative attractiveness of illiquids change over time as they go through cycles.
• Selective & Disciplined – We’ve learned very quickly that we will decline many more opportunities than we will on-board, as there is significant emphasis on value creation and risk mitigation
• Persistence - We’ve seen many times how certain opportunities, which don’t immediately tick all the boxes, need to be investigated further, re-framed or restructured to become something that meets our investment objectives.
• Review – it’s always been important to regularly look back on investment activity & analyse what has worked well, and where we can do better, in certain segments of the market.
  
  

Sara: How do you judge the success of an illiquid investment programme?

Anand: There are several areas that can be assessed when performing such evaluation:

• Has the illiquid investment strategy contributed to your financial and non-financial objectives (e.g. promoting ESG outcomes, improved ALM)? Does it create lasting change which gets buy in from different stakeholders?
• Can these objectives be still achieved adopting a selective and disciplined approach?
• Is there continual movement into new assets / sectors / geographies or reliance on limited sources of illiquidity premium?
• Do you understand the risks being on-boarded and interactions with the rest of the portfolio?
• Can you frequently influence the structuring of transactions to get the spread, tenor and protections which optimise your risk versus return?
  
  

Judged on these criteria, our deployment into illiquids thus far has been successful, including to inform increased deployment going forward.