Panellists
Nick Dixon, Investment Director, AEGON UK
Erik Ranberg, Chief Investment Officer, Gjensidige
Corrado Pistarino, Chief Investment Officer, Foresters Friendly Society
Ed Palmer, EMEA Chief Investment Officer, MetLife
Ed Palmer: Our main areas of interest are corporate private placements, infrastructure and real estate.
In terms of the challenges, one issue is the ability to get cash into the market. If you set aside something in your strategic asset allocation for private credit but then for whatever reason don’t manage to fill it, what is your back-up plan going to be.
"One issue is the ability to get cash into the market."
This is certainly a live issue for investors and there are constraints such as competition in the market, a finite pool of assets and difficulty in identifying all the characteristics that you might be looking for as an insurer.
And, with growing competition there is some erosion of the illiquidity premium, credit protection etc. that perhaps, we as investors have become used to over time.
Corrado Pistarino: Foresters is a mutual with a small balance sheet. We are currently invested in real estate and SME debt, and in the process of increasing exposure to alternatives, balancing capital growth and yield generation.
The challenges for a small insurer are the same ones that MetLife or any of the bigger insurers face, but they are amplified by reduced economies of scale.
As an example, market access can be constrained by a combination of minimum investment threshold, a less favourable remuneration structure and hard limits on currency exposure.
"In terms of investment governance, we need to balance our
ambitions with the size of ourinvestment team."
While I have a strong preference for global investment propositions, setting up a currency-hedging program – while not exceedingly complex – calls for higher governance and a long-term commitment to additional operational streams.
In terms of investment governance, we need to balance our ambitions with the size of our investment team.
For Foresters, the question why to invest in a specific asset class, and whether we have the correct skillset to evaluate, assess and monitor that specific investment, while complying with the prudent person principle and remaining efficient, is particularly testing.
Erik Ranberg: I would actually like to go back to the ordinary listed markets if it were possible. We are in private equity, private real estate, private debt etc., but we are getting “pushed” into these markets and I have been trained in the listed markets.
"I would like to go back to the ordinary listed markets
if it were possible."
I now have to be trained in the private markets and this is hard work because it is very different to invest in private markets versus the listed markets.
I would emphasise when going into the private markets that you should remember the vintage. The way that the cashflows are in these markets you do have to be very careful with the vintage when investing in them.
Nick Dixon: I come at this from a very different perspective because we have around 170 billion of assets in the UK. Much of that is third party funds on the platform but 60 billion is workplace pensions and default funds.
Although we are an insurance company and these are insured funds, effectively they are unit-linked assets. So we don’t have the liability and matching issues of running a large balance sheet.
Nevertheless, we are considering less liquid and private assets for these funds. To put it into perspective, we have about 6-7 billion of inflows a year so there is wall of reliable money coming in every month.
"Liquidity never really matters and no one worries about it until suddenly
it really matters, and it traps people into assets that cannot be traded."
Therefore, theoretically we have a bit of flexibility for private assets and illiquid securities.
However, I am very nervous about it in our kind of market because because daily liquidity and trading is a huge confidence builder and very important for the average investor.
The second concern is around liquidity, because in the market that we operate in, liquidity never really matters and no one worries about it until suddenly it really matters, and it traps people into assets that cannot be traded.
"We don’t have a lot of head room in a market for illiquid
assets that are costly to analyse and trade."
There is also a concern around cost as we have no capability intellectually to look at these assets. So, we would have to do it through a fund manager, and this would cost a number of basis points, perhaps 50-100, and we sell a default fund which costs 5 basis points.
So, we don’t have a lot of head room in a market for illiquid assets that are costly to analyse and trade if you are charging 5 basis points which is a total charge including transaction costs.
There are significant barriers from an insurance company perspective where you are running large, workplace default funds, which is different from the balance sheet problem.
Corrado: The costs structure is a crucial issue, and it is related to the opaqueness of private markets.
Management fees are a subset of broader agency costs. Is the alignment of interests with the manager absolute, as often claimed? What is the level of moral hazard and is it clearly identified and priced in? Can adverse selection be generally excluded?
Hence the importance of a thorough manager due diligence to mitigate the principal-agent asymmetry.
