Case study: How the Phoenix Group is using private markets to meet business objectives

Insurance Investor: Why have private assets been so important to your portfolio?

Anand Kwatra: The bilateral nature of these deals means we can pull a number of levers that suit our needs at a particular time and thereby extract value for us and the borrower. Within our annuity portfolio, the illiquid assets provide long term predictable cashflows to back our pension liabilities.

Private assets provide the illiquidity premium to help us meet our business objectives, such as increasing yield on the in-force back book or pricing new business to meet competitive and profitability targets.

"Private assets provide the illiquidity premium to help

us meet our business objectives."

Additionally, some private assets can offer longer duration compared to corporate bonds. For example being able to source long dated social housing or infrastructure opportunities with a particular amortising profile which is not easy to find in the public market.

In a similar vein, private assets can sometimes improve the credit risk profile if one can access high quality credit opportunities which are not necessarily available in sufficient size in the public market.

Increasingly, private assets help us to fulfil our ESG and sustainability objectives, since certain opportunities will allow lending to the real economy to drive social impact.

Insurance Investor: Is the illiquidity premium the sole driver when investing in private assets or are there others?

Anand: It is an important driver and does have a major influence on the investment decision. We will compare private market opportunities versus comparables in the public market, although finding the appropriate comparable is not always easy and can be subjective.

"Private assets can offer other benefits like portfolio management."

However, the illiquidity premium is not the sole driver. As mentioned above, private assets can offer other benefits like portfolio management; broadening access to different types of credit or increasing diversification, improving the ALM matching position; and harnessing positive ESG opportunities.

In some opportunities, there may be an argument for sacrificing some illiquidity premium to take advantage of these other benefits.

Insurance Investor: How is the ongoing downturn from Covid-19 impacting your private asset strategy?

Anand: The situation has not fundamentally changed the long term strategy of sourcing long-term investments to match our long-term illiquid liabilities.

However, the downturn has led to our re-appraisal of the credit risk in these investments. We need to assess which sectors are suffering a short term change in credit profile which may normalise once the crisis subsides, and which ones will be impacted on a long term basis.

"We are drawn towards private assets that are in more defensive sectors."

We are drawn towards private assets that are in more defensive sectors or have a government / state backing, and less to those in sectors which are more cyclical.

There is careful scrutiny on BBB investments, both public and private, since a downgrade to sub-investment grade is penal from a capital perspective.

Insurance Investor: What challenges are opportunities are you anticipating within the field of private assets going forward?

Anand: Like peer institutional investors, our investment in private assets will increase over time to help meet our objectives.

This will require more resources, and lead to more scrutiny on private assets from the different stakeholders.

I also see competition for private assets remaining a challenge, since many institutions will also see the benefits of these opportunities.

"The recent volatility has provided the ability to access some attractive

illiquid credit opportunities at favourable spreads."

Another challenge is ensuring our expanding private asset portfolio remains appropriately diversified across many dimensions, for example by geography, sector and asset class to name a few.

In terms of opportunities, the recent volatility has provided the ability to access some attractive illiquid credit opportunities at favourable spreads.

There will also be opportunities in this space to allocate capital to the real economy to help facilitate the post Covid-19 recovery and drive a more sustainable future.

Insurance Investor: Do you think that private assets will continue to justify the effort needed to buy and maintain them?

Anand: There will be considerable effort in due diligence of new opportunities. These transactions need to be carefully structured at outset to manage risk appropriately, and the private asset portfolio must be continually monitored.

Nevertheless, this effort will be justified if private assets keep allowing investors to meet their key investment and social objectives.