Can insurers make high-quality private credit pay off?

James Hayes,
head of the insurance credit team,
L&G asset management

An environment of slowing growth, tighter spreads in public markets and evolving regulatory frameworks is fertile ground for the key perks of private credit: yield, structure and stability. For insurance portfolios in more mature Asian markets, in particular, their desire to enhance income and diversify risk has been drawing them to this asset class.

To date, many insurers in Hong Kong, for example, have placed sub-IG private credit within the growth assets part of the portfolio, to generate extra returns of high-single to double digits.

Where there is greater scope for them to maximise private credit’s potential, is investing in it as part of the liability matching portfolio.

This is the approach Legal & General (L&G) takes, mostly via IG private debt. This is in the form of corporate debt (sometimes referred to as “private placements”), infrastructure debt, real estate debt and alternatives such as asset-backed finance and fund financing. It is worth noting that while the IG private debt spaces have existed for many decades, and don’t represent newly established markets, awareness of them and their through-the-cycle performance has grown.

Three key factors fuel the sizeable allocation that L&G makes in the IG private credit space:

• Exposure to medium to long duration fixed cash flows for liability matching purposes
• Diversification, accessing a wider range of issuers and sectors than in public markets
• Greater through-the-life cycle returns in default-type scenarios, as a result of structural protections (for example, covenants and security (sector specific)) associated with private debt

Possibly the biggest driver of demand for IG private debt is the potential for the rating-adjusted return pick-up. This might be between 50 to 100 basis points – comparable with public bonds – and offers consistency of return and of opportunity flow that appeals to life insurers.

Capitalising on the IG private credit opportunity

A multi-strategy approach can be an effective route to finding attractive investment opportunities across the IG private debt universe.

The choice of asset class then gets determined by which one offers the best return at a given point in time, and also which of them works best under the individual insurer’s own liabilities, capital regime, risk appetite and other constraints.

Today’s market dynamics, for example, have led to appetite for fund financing. This stems from credit spreads in public markets being close to all-time tights. In turn, taking some spread reinvestment risk at current levels via the shorter duration nature of fund financing enables investors to be more agile rather than locking in spread component for a longer time period.

At the same time, insurers can roll this strategy into longer duration private debt when spreads widen.

More specifically, instead of an eight- to 10-year duration, six to eight years is increasingly popular. While this may involve the insurer taking some spread reinvestment risk, interest rate risks, versus liabilities, are typically hedged out with derivatives.

Meanwhile, within their growth portfolios, some insurers in Europe are blending IG and sub-IG solutions, to show some caution but still with their return target in mind. In this regard, the BB universe – the “crossover” credit space, which is distinct from B rated (or below) “direct lending” – is increasingly attractive: namely investing in assets with similar default dynamics as IG (often issuers might not be able to attain IG rating due to size) but for additional return.

Confronting the challenges of valuation, liquidity and resilience

Compared with sub-IG assets, IG private debt is typically fixed, rather than floating rate, in nature. This enables insurers to use discounted cashflow models to value these assets.

In L&G’s case, it bases its valuations on three main components to the discount rate:

• The risk-free rate
• A spread on a basket of compactor public bonds
• An illiquidity premium

In short, using a bond-like valuation approach, with a discount rate based on updated market parameters, creates comfort for L&G over of value it places on the assets.

Further, L&G’s confidence in the valuations reflects the fact the typical investors are institutions such as pension funds and other insurers – with robust regulatory oversight of the valuation of the assets.

Yet, private credit still faces challenges One consideration, is the resilience of sub-IG private credit, in particular, to a moderate-to-severe economic downturn given the scale of the sub-IG allocations that now exist.

How portfolios will perform, and the potential knock-on effect, are big unanswered questions. For the time being, diversification is being used to provide protection against that scenario – by vintage and asset class.

Private credit: a strategic growth driver

The bigger picture for IG private credit looks bright as far as L&G Asset Management is concerned.

Not only has L&G’s platform in Europe and North America driven this so far; it has also come through Pemberton, a specialist European private credit manager in which L&G acquired a minority stake in just over a decade ago, in 2014.

The upshot has been a jump in private credit AUM for L&G, to US$47.2 billion as of June 2025 – with the firm making it clear that private markets more broadly is a core part of the business strategy going forward.

_Disclaimer

_{Key risk
The value of investments and the income from them can go down as well as up and you may not get back the amount invested. Past performance is not a guide to future performance. The details contained here are for information purposes only and do not constitute investment advice or a recommendation or offer to buy or sell any security. The information above is provided on a general basis and does not take into account any individual investor’s circumstances. Any views expressed are those of L&G as at the date of publication. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation.}

_{Issued by:
Hong Kong: Legal & General Investment Management Asia Limited, a Licensed Corporation (CE Number: BBB488) regulated by the Hong Kong Securities and Futures Commission (“SFC”). This material has not been reviewed by the SFC.}

_{Singapore: LGIM Singapore Pte. Ltd (Company Registration No. 202231876W), regulated by the Monetary Authority of Singapore (“MAS”). This material has not been reviewed by the MAS.}