The changing needs of insurance investment teams to combat sluggish economic growth, high inflation, and falling real estate prices in the five Nordic countries – combined with recent market volatility – has meant a mass re-evaluation of private markets holdings.
In the past 12 months, there has been a significant repricing of private assets, as the previous decade of strong prices and performance came to a sudden end. Areas once seen as safe havens are no longer guaranteed to generate return, and allocation is shifting as a result.
Kari Vatanen, Chief Investment Officer at Veritas Pension Insurance Company, told Insurance Investor that many insurers, pension funds, and other asset owners in the Nordic region have had to re-evaluate their holdings due to these pricing changes.
Veritas is a Finnish pension insurer that specialises in products for the entrepreneur and small business section of the market. In its Q1 2023 results, it reported that its investments had returned 1.6% and solvency was 1.7 times the solvency limit.
Vatanen said the company is able to bear more risk and have an endowment style allocation “because we are not matching our duration layer on the liability side”. “That's why we are handling the asset part as a buffer fund.”
Veritas’s investments were valued at €4.3 billion in 2023, with the largest segment allocated to fixed income. Listed equities and alternative investments – including real estate – came in second and third place.
This isn’t surprising. In the Nordics region, it is common for fixed income to make up a far smaller proportion of an insurer’s portfolio than it is in other areas of the world, such as the US, where it could comprise a much higher proportion of investments.
Vatanen’s summation is important because the trend he is describing could indicate that the wider market will soon see a lag in prices – with private equity decreasing as public equity prices go up. One positive, however, is that the timing for buying into private debt and special situations could be right
“We evaluated our direct real estate holdings at the end of the second quarter,
[and] we have seen a five-to-ten percent downgrade in valuations."
Whilst Vatanen said he saw many kinds of investors re-evaluating their private equity holdings despite these potentially optimal market conditions, private equity was another story.
Vatanen said that he saw all kinds of investors – limited partners (LP) and managers – General partners (GP) not re-valuing their private equity holdings despite market conditions but private debt was a very different story.
One of the main areas where Vatanen saw changes happening was in the real estate field.
He noted that property valuations were decreasing, which meant allocation strategies would have to adapt accordingly. “We evaluated our direct real estate holdings at the end of the second quarter, [and] we have seen a five-to-ten percent downgrade in valuations,” he said.
Higher, and still increasing, interest rates – designed to curb inflation – are a major contributing factor to the downgrades. The rate hikes, the highest since 2001, have seriously impacted buyer appetite across the region, said Vatanen.
In Sweden, for example, some economists have anticipated a 20% downturn in property prices from peak to trough, which one January 2023 report heralded as a “day of reckoning”. Additional value shifts, said Vatanen, were expected through the end of the year.
“The gap between rental income and the return generated by
bond investments has narrowed considerably.”
A Nordea report said in June that “the factors slowing down the housing market, including the sharp increase in interest rates, weaker purchasing power and a drop in house prices”, were subsiding. Despite this slowdown, housing rates are still “sluggish”, the report noted.
However, there was still a touch of optimism. “The total return on property investments has become negative as prices have fallen, but the outlook going forward is brighter,” it said.
The report also highlighted the same issues Vatanen focused on – particularly the fact that real estate markets were becoming less attractive to investors than more traditional investment areas, currently seen as increasingly better sources for stable income. “The gap between rental income and the return generated by bond investments has narrowed considerably,” it continued.
Similar developments have also occurred in equity markets, where risk spreads – relative to bond investments – have shrunk as bond yields have increased. Amidst these volatile conditions, the report reminded that a steady, cautious approach focused on longevity was key. “Property investing often requires a long-term approach,” it said. “You don’t necessarily sell your investments because of interest rate fluctuations in any given year.”
Offering a more global perspective, Vatanen said that whilst re-evaluations in real estate funds were generally common, the worst was potentially over.
The future, he added, was “highly dependent” on developments in individual sectors – as well as regions. “Maybe there are more [downgrades] to come, but [it] might be over in the next few months,” he continued. “
Vatanen argued that it was possible the impact of interest rate rises had already taken their full toll on real estate markets – which could mean that valuation changes have settled for the year. “It’s a better situation [now], because the yields are higher after the re-evaluation,” he explained.
“We’re waiting for the right time to go back into [this area].
The problem is that we haven’t seen any good capitulation.”
On the private debt side, the situation was quite similar, Vatanen said. He compared conditions there to private equity and real estate – noting that private debt fell somewhere in between the two. Private debt markets had “already reacted to the changes in interest rates and the credit environment”, he said.
However, it was still a waiting game for investment teams, he said. “We’re waiting for the right time to go back into [this area]. The problem is that we haven’t seen any good capitulation.”
For insurance companies, these recurring conditions could indicate a wider trend. It’s possible a new cycle is beginning for private markets – one that favours diversification and sees movement away from sectors that could be hit hardest by cultural changes.
