Transcript of the discussion below:
Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name’s Stewart Foley, I’ll be your host. Welcome back. It’s great to have you. Thanks for joining us. And today’s topic is private placement fixed income, and we’re joined by Alex Alston, who’s division director and co-head of private placements at Macquarie Asset Management. Alex, thanks for taking the time, and thanks for joining us.
Alex: Thanks for having us. We are pretty excited to be a part of this podcast.
Stewart: That’s great. Let’s start off with the way we start them all. What was your hometown, the one you grew up in, what was your first job, not the fancy one, and what makes insurance asset management so cool?
Alex: I grew up in East Orange, New Jersey up until about sixth grade. And then we moved to Old Bridge, New Jersey with a brief stint in Columbia, Maryland, in between, but mainly in New Jersey. My first job, I’m assuming as an adult, paperboy and soccer ball boy don’t really count. But my first job was working on an online brokerage distribution platform called PCFN, Personal Control Financial Network. I’m dating myself a bit, but that was on Prodigy, which predated America Online, AOL. That was quite a minute ago.
Stewart: That’s early days there.
Stewart: Good stuff.
Alex: That was in the time of dial-up modems, that’s correct.
Stewart: Absolutely. And what makes insurance asset management so cool?
Alex: It’s recently become cool. It was a relatively quiet asset class for decades. Something that only life insurers, pensions, and endowments from time to time invested in, but mainly life insurance companies. But as of the last few years, it’s exploded in popularity and we’ve got all sorts of alternative investors moving into this space. There’s a lot going on now.
Stewart: I love it. Just to level set things for us and our audience, can you help me define private placement fixed income?
Alex: I can. The one thing I’ll say is private placements, it’s like a tapestry. The only thing is if you’re not in the market, you can only see it from the back. You can’t really appreciate what’s going on. I’ll try and paint a picture or set the groundwork, if you will. The assets can be anything from corporate bonds, infrastructure, project, finance, structured credit; you could be looking at a UK industrial manufacturer, a toll road in Australia, US utility, a European sports arena, or even an airport in Latin America. But at the base level, we’re talking about a global capital market that’s available to qualified institutional buyers.
Roughly a trillion outstanding, maybe $80 to $100 billion in new volume per year. And the assets themselves, they’re investment grade credit instruments with characteristics resembling both public bonds in the sense that they’re medium to long-term term in tenor and they have fixed rate coupons, but they also have characteristics similar to bank loans in the sense that they have structural protections, there’s a relationship element, and they certainly require heightened due diligence in monitoring.
Stewart: That’s interesting. And as you mentioned, there has been a very consistent and strong trend to private assets by insurance companies, right? What do you think is driving that trend? In other words, why private placements?
Alex: Sure. There are a few things. I guess I’ll tackle that question in two parts. For the last 10 years, we’ve had a period of extreme global quantitative easing, and we’re looking at zero real interest rates and insurers, just like all other investors, were looking for yield wherever they can find it. Private placements often provide yield enhancement relative to an otherwise all public bond portfolio. We saw insurers increasing their allocations to privates. Separate and away from that, we’ve had a situation where a number of alternative managers are moving into the reinsurance space in part to have access to permanent insurance capital, which they can then invest in their regular alternative assets, be they mezzanine funds, distress funds, private equity or what have you. But in order to participate in that, you’ve got to have a fair amount of the assets invested in what I would call traditional insurance assets.
And public bonds and private placements fall in that category. Because of that, we’ve seen alternative managers move into this space, a lot of them building out their own private placement capabilities. And the third thing leading to that increase would be more entrance into the market from overseas insurance companies. Again, just like the US companies looking to increase yield. That’s why the growth in private placements from an investor standpoint, but why insurers are really looking at the market in the first place is the assets are really just well suited for asset liability management. They’re long-duration assets and they’ve got stable cash flows, given that their fixed rate, investment grade and have prepayment protection. We’ve always seen insurers, and again, we’re seeing more so now that have a permanent allocation to corporate credit include a layer of private placements in their portfolios.
They tend to take a holistic approach and view the private sleeve as complimentary to their public bond holdings. And what makes them complementary are a handful of benefits that they typically derive from investing in the asset class. The first of which is the potential for yield enhancement. And like I said before, with 0% interest rates that was certainly attractive to most insurers. You’ve got insurers that are effectively trading liquidity for additional spread upfront, but you’ve also got ancillary income from amendment fees and prepayment make holes and you’ve got better recovery. All of those tend to come together to help enhance yield in privates relative to publics. But you’ve also got diversification benefits in the sense that there are many names and sectors that are available in a private space that you can’t access easily in the public markets. There are structural protections in these assets, like I said earlier, similar to bank loans looking to protect investors from negative credit migration, maintain their position in a capital stack, and guard against certain forms of moral hazard. And finally, the assets are capital efficient, meaning that the insurers are charged the same reserve requirements, at least US insurers, are charged the same reserve requirements for a public bond as they would a similarly rated private bond. But again, with the yield enhancement, it makes them capital efficient.
Stewart: That’s really helpful. And you mentioned this tapestry of private placement fixed income, it covers a lot of ground, right? What areas is Macquarie focused on in that space?
Alex: Great question. Thanks for asking that, Stewart. We have been investing in the private placement market for well over two decades. We are set up with analysts that are industry specialists. As a result, we invest across the spectrum of investment grade private placement. We’re doing everything from corporates to structured deals, AATC’s, sports transactions, infrastructure transactions, project finance, et cetera. We have a bit of a boutique feel, which enables us to really put client service first. We take a partnership approach, but don’t lose sight of the fact that we are part of a $540 billion AUM global asset manager. And we routinely leverage resources from across the firm, including the derivatives group, which enables us to participate in non-USD transactions and swap back to the functional currency of our clients, leveraging other parts of Macquarie’s ample infrastructure capability or public research group or what have you. What that means is we are a boutique shop. That comes with a partnership approach and true commitment to the client experience, but because of our very capable parent, it enables us to really punch well above our weight.
Stewart: That’s really helpful. And it is important to know how big your parent is. I mean, it is a massive asset management firm and one with significant capabilities. One of the things I think that has changed dramatically over the last 18 months is that rates are substantially higher and everybody’s talking about inflation, right?
Stewart: Does this environment change the attractiveness of the asset class? How can you position privates in our current higher interest rate, higher inflation environment?
Alex: That’s a fantastic question, Stewart. I’ll start off by saying that we view private placements as an all-weather asset class. Sure, the assets may be less well suited for total return investors given the reduced liquidity, especially in today’s environment. But for liability-driven investors or ALM investors, asset liability management investors, it truly is an all-weather strategy for a number of reasons. First, we underwrite each transaction through the cycle. Regardless of where we are in the cycle, we underwrite transactions looking through the cycle. That’s helpful. But second of all, the benefits continue to accrue across the cycle to investors. And those complimentary benefits that I touched on before are diversification. Regardless of where rates are or inflation, these assets are still diversifying to an otherwise all public portfolio. You are still getting incremental spread over publics. Depending upon where the environment goes, the ancillary income may actually increase in times of economic stress or challenge because you may be looking at a lot more with respect to amendment fees and waiver fees, things that you wouldn’t ordinarily have access to in the public markets. And that’s really born out by the structure, the covenant. Those take on even more prominence or importance in challenging economic periods. Again, we view this as an all-weather strategy for the right investor type.
Stewart: One of the things that has always interested me, and I’m a business owner and I’ve got to find financing too, right? At the end of the day, one of the questions I guess I have is why do borrowers access this market? And then I want to talk about deal flow and sourcing and how Macquarie is unique there, but why do borrowers access this market first?
Alex: Again, another great question that really gets to the heart of why this market exists. I think in order to address this question appropriately, I would like to start off with a little bit about who are the borrowers. And in that sense, I would say that there are mid-size firms that want long-term fixed rate debt. There are large corporations that are issuing complex securities or securities with non-standard features. There are firms wishing to issue quickly with minimal disclosure requirements, or oftentimes there are complex infrastructure or project finance assets looking for financing or highly structured transactions. All of that is to say that the reason borrowers access this market is flexibility. This market has the flexibility to accommodate the nuanced needs of such a disparate borrower base, but the market also has flexibility with respect to maturity profiles, amortization schedules, currencies, delayed fundings, et cetera. If you think about it, when you think about the different types of borrowers and all of the different accommodations and deal types, this market is, I don’t know, I guess in many ways it’s sort of the Baskin Robbins of capital markets with, I guess, that would be 31 flavors of investment grade debt.
Stewart: I like it. That’s a great way to look at it. Obviously deal flow and sourcing deals is key, right? And one of the reasons that people go to asset management firms is that you’re seeing much better deal flow than I would, for example, if I was going to go out and try to participate in this market directly. Can you talk a little bit about where you think Macquarie’s process in sourcing is unique and perhaps where there’s a competitive advantage?
Alex: Absolutely, absolutely. You’re right. Deal flow access is critically important. You also obviously have to have the knowledge and infrastructure to perform the due diligence and the ongoing monitoring. Essentially those are the same function, it’s just one happens before you give these guys the money, the other happens after you give them the money. But thinking about Macquarie in particular, I’d say that there are a number of favorable intersections where things come together to really create something that is positive and potentially beneficial for our clients. Kind of think about milk and cookies, peanut butter and jelly, bacon and, well bacon and anything, no matter what you fill in there, bacon goes good with it.
Stewart: I like it.
Alex: Chocolate, skateboards, it doesn’t matter. But to their point, like I mentioned before, we are a boutique platform that really, really truly focuses on client service or the client experience. We embrace a partnership model and at the same time we sit within a $540 billion AUM asset manager with tremendous expertise and infrastructure, a strong reputation. And like I said before, we leverage different parts of the organization in our daily process and that enables us to punch above our weight. Another instance or example where things come together are that, like I mentioned before, we have over two decades of experience investing in private placements on behalf of insurance companies. As a result of that, we’ve got a robust knowledge of private placement investing. We’ve got strong relationships across the agent and broker community, which obviously leads to a strong deal flow, and we’ve got a deep knowledge of insurance investing, but at the same time, we’re an independent manager. What that means is you don’t have the potentially unsavory aftertaste of shadow portfolios or competing with your manager for allocations.
And finally, according to PPIA, the Private Placement Investors Association, we are a tier one manager, which is basically a manager with $10 billion of privates under management or more. With our history in the market and our strong agent relationships, we see most of the syndicated market deal flow. However, given we’re sized such that we don’t have to buy the market, we can remain highly selective, but still be impactful on our portfolios. Those are just a few instances where we sit at the intersection of things that we think set us apart in this market.
Stewart: That’s really helpful. We’re kind of coming up to the wrap portion of the program. I’ve got one fun question for you before we go, but what is-
Alex: Let me ask you before you ask it. Is it fun for you asking it or is it going to be fun for me answering?
Stewart: It’s going to be both.
Alex: All right.
Stewart: It’s going to be both. What would you want our audience to take away? Are there a couple of factoids or talking points that you’d want our audience to walk away from this podcast today?
Alex: Absolutely. The first that I would say is if you have a permanent allocation to corporate credit, I would encourage you to consider private layering in a sleeve of private placements. They are not going to be a replacement for your public bonds. Take a holistic approach and they can be complimentary to your otherwise all public portfolio. The benefits that this asset class is most known for is the potential for yield enhancement, diversification benefits, and structural protections. And finally, Macquarie has a rich and robust history investing in private placements on behalf of insurance clients. We know both insurance investing and the private placement market inside and out.
Stewart: Fantastic. That’s a great way to wrap. I’ve learned a lot and I appreciate it. My fun question on the way out, you can have your choice, you can take either or both. Who would you most like to have lunch with, alive or dead, or best piece of advice you ever got? You can do them both or you can take your pick.
Alex: I’ll take them both. I don’t know how many people I can bring to lunch, so maybe I’ll bring three. It’ll be a force and we just finished playing golf and we’re having lunch at the clubhouse. I would include Thurgood Marshall-
Stewart: Wow, there you go.
Alex: So that he can retrace the steps that he took in the civil rights movement as many of his gains have recently been eroded and they continue to do so. I would include Michelle Obama so that she can contextualize for him what we’re looking at today. And I would include Michael Jordan because I’m a big fan and I wouldn’t mind talking to him more about game prep and competition and to see if he can give me any pointers on a good crossover.
Stewart: I like it, I like it. Thank you very much.
Alex: Now the other question was best advice. Unfortunately, I got this advice relatively recently. It was kind of advice for my daughter. I wish I had gotten it much earlier in life, but that is to live life unapologetically. Live your life boldly and out loud. Don’t be afraid to take risks. Stretch yourself, because at the corner of risk and discomfort, the building on that corner is growth. Again, don’t be afraid to take risks and embrace change. In fact, even look for change because that’s where opportunity resides. Again, be bold, be daring, and live your life like it’s the only one you’re ever going to have.
Stewart: I love it. That’s great. Thanks for being on. We’ve been joined today by Alex Alston, who’s division director and co-head of private placements at Macquarie Asset Management. Alex, thanks for being on.
Alex: Thank you, Stewart. I enjoyed this.
Stewart: That’s great. Me too. And thanks for listening. If you like what we’re doing, please rate us, review us on Apple Podcast, Spotify, or wherever you get your favorite shows. My name’s Stewart Foley, and this is the InsuranceAUM.com podcast.
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