KKR: Insurers embrace ‘new world order’ for asset allocation

Insurance companies are branching out into new investment products, including private equity, in an effort to combat a challenging investment environment, according to KKR.

A survey conducted by the KKR global macro and asset allocation team and the insurance asset management team found the absolute low level of interest rates and the tight level of credit spreads have significantly depressed the average portfolio yields on the close to $3 trillion of investable insurance assets surveyed.

This, coupled with a variety of other factors including growth in excess capital across the insurance industry, more efficient structures, and low correlations among alternative investment strategies, is driving insurance companies toward non-traditional investments.

The private equity allocations of those surveyed have almost doubled to 2.4 percent since 2014. Private credit – which remains the largest absolute alternative allocation – increased to 5.6 percent from 4.7 percent during the same period.

The survey was presented in ‘New World Order’, by Henry McVey, head of global macro and asset allocation.

The increase in private equity allocation indicates the importance of the asset class as a tool for boosting returns, McVey wrote.

“Not surprisingly, strategies that help mitigate the J-Curve, including buying PE secondary ‘blocks’ and/or robust co-investment programmes (alongside significant fund commitments) are gaining in popularity,” he wrote.

“However, similar to a complaint we heard about real estate equity, there is some consternation that real income is not booked until capital is actually returned (though mark-to-market does help along the way).”

Around 27 percent of survey respondents indicated they intend to increase their allocations to private equity this year, while 29.5 percent plan to up their private credit exposure and 36.4 percent will increase their allocations to real estate credit.

McVey warns that if alternatives want to gain further share, they must continue to perform, otherwise the associated fees will be hard to justify.

“Even with increasing use of more capital efficient structures in many non-traditional investment products, superior investment performance remains a prerequisite for success,” McVey wrote.

KKR calculated that private equity investments must generate returns of around 8 percent, or roughly 500 basis points above the returns of investment-grade credit, to offset their balance sheet capital requirements.

For survey respondents, illiquidity concerns and capital requirements topped the list of major external obstacles faced when investing in private markets.