Stewart: My name’s Stewart Foley, I’ll be your host. Welcome back. It’s nice to have you. Thanks for joining us. And today’s topic is private structured finance and in parallel, demystifying the relationship and collaboration between Aegon Asset Management and Transamerica Life. I’m glad we’re going to do that because it’s going to help me understand it better too.
We are joined by two very accomplished insurance professionals, Ryan Patterson, who is the head of investment strategy at Transamerica and has been with Transamerica since 2012. And Jim Baskin, head of private structured finance at Aegon Asset Management and has been with the firm since 1996. Ryan, Jim, thanks for taking the time. Ryan, let’s start with you.
Ryan: Yeah. Thanks for having me, Stewart.
Stewart: Okay. So before we go too far, where’d you grow up? What was your high school mascot and what makes insurance asset management so cool?
Ryan: I grew up in Northwest Iowa, Fort Dodge. We were the Dodgers. I can’t really tell you what a dodger was. It looked like a black and red hotdog I guess. The cool thing about insurance asset management is that it just evolves over time and I think that we’re constantly learning and coming up with new strategies and I think that we’re really putting together investments that complement the products that we sell. And I think it’s a good evolution that we’re going through right now.
Stewart: Outstanding. Thank you so much. And we’re also joined by Jim Baskin. Jim, welcome. Thanks for being on. Well, a little different question maybe. How about where’d you grow up? What was your first job and a fun fact? Or you can answer what makes insurance asset management so cool. Up to you.
Jim: Thanks for having me. I grew up in Knoxville, Tennessee. My first job was in the automotive department of Kmart, and I’m going to go with asset management. I think the most exciting thing about asset management for insurance companies is managing those assets for an insurance company is really one of the most, I think, hardest jobs out there. So it’s a very sophisticated skillset and I think several people will challenge me on that in the investment industry. And it’s just because they haven’t done it. The rules are ever changing, and of course the markets are ever changing. And getting those two to overlap is a special skill and I think it requires a level of diligence and acumen that is pretty prized in the investment world today.
Stewart: Jim, you are among friends here. I assure you, the InsuranceAUM.com nation wholeheartedly agrees with your assessment of the complexity of insurance asset management. So thanks for being on both of you. So just to dive in here, Jim, I want to start with you. I mean, there are younger people who are listeners, and I think it might be helpful to talk about what the market was like, this particular market, in the early days of private structured finance, say late eighties, early nineties. Can you set the stage for us at that point and just where we were and maybe a little bit about how we got to where we are?
Jim: I think it’s a really interesting point. I’ve been with Aegon and predecessors of Aegon for almost 28 years now, and I was lucky enough to come from a prior job to Aegon and start in the private ABS, private structured finance group. And back then I considered the insurance community really the powerhouse of credit. Every insurance team or insurance company, your listeners all had very experienced, very well staffed, private placement, private groups. I know we had a very sophisticated and broad-based private corporate group, and I know that that still resides in a lot of the insurance companies today, but we also did direct lending and mezzanine credit. There were companies out there that did direct lending and munis. I started in the structured finance group and, of course, structured finance in and of itself was a new asset class back in the late eighties, early nineties and every new issuer, new asset class was generally introduced through the private placement market. If they wanted access through the securitization market, they generally had to come through the private placement channels. And I remember 20, 30 years ago going on due diligence trips and just being amazed at the variety and breadth of insurance companies that were involved in these transactions. And I think it really spoke to the ability of the insurance community at that time to really have a focus on credit, particularly private credit. They had the balance sheets, they had the staff and the expertise to directly originate loans.
Now, some of these may be direct originations, narrowly syndicated originations, maybe even broadly syndicated originations. But they were all in that private space and they required a level of work, a level of commitment both from documentation to negotiation to legal work, to managing those assets that I think a lot of our listeners today really wish they had those skill sets again, because private credit and interfacing in the private markets is really important as a foundation to insurance company balance sheets today and driving returns. But somewhere along the line, I would say pre-financial crisis and then certainly after the financial crisis, there was a lot of need to standardize activities. The cost and the work of maybe doing a private transaction could be made a bit more efficient. And I think the way of the 144A and moving things from investment committees to desks to help streamline some of these activities really started to whittle away at the industry skillset sets.
Now, some of the larger insurance companies have always maintained deep integration within private markets. I know we have, especially on the structured finance side, but you could see some of that expertise and some of those skill sets moving away into other markets, other participants, other specialized asset managers. And I think today if looking back, we really wish we had more of those skill sets still in place.
Stewart: That’s really helpful. And on the heels of this transformation, we’ve seen a massive influx of insurers and institutions alike allocating to various forms of private credit stemming from the zero rate or super low rate environment post GFC up until the end of 2021. The concept of intermediation comes to mind. And I’m curious on two fronts. One, are there drawbacks or downside to this growth trajectory? And I’ve been asked numerous times, well, with rates higher, are all the funds going to dry up to private credit to which my answer has been uniformly, absolutely not. Do you agree with me? And what can you tell me about this secular shift?
Jim: I think private credit has always, or at least we have always used private credit as a foundation and an alpha generator for the portfolios. But coming out of the GFC, there was a period of time of healing. So a lot of the insurance community did need to step back in order to reassess current risks in the portfolio, but zero interest rates hit them the other way, which is, there just aren’t a lot of great investment opportunities out there. And this has made a lot of asset managers, a lot of insurance companies come back to alternative and private credit as a source of additional return. Most insurance companies have the ability to handle illiquid credit. Because of their liabilities, they can afford to use the illiquidity on the liability side to take advantage of additional returns and premiums on the private placement side.
And we know that this has been an area for excess returns for us for quite some time now. Coming out of the GFC, what we have seen is private equity really using their abilities to raise additional funds. I mean, they are very good at raising capital, and these players have really outshined some of the insurance communities, especially in the low interest rate environments where it’s just hard to sell product. And the private equity funds have really used their success in the private equity markets to move into private credit markets, to move into acquiring originators, acquiring blocks of business in the insurance community. And they’ve really created a formidable competitor to the traditional insurance company position. Low interest rates haven’t helped. And you’ve seen, just to echo what you alluded to is insurance companies really rushing back into private credit to really fill that void. But in reality, this is something that really should have always existed as a core tenant to those portfolios and really utilized and bolstered returns because they really have the illiquidity on the liability side to give.
Stewart: So Ryan, I want to bring you in as well. It sounds like this probably means a lot more calls from managers covering the gamut of asset classes. Is this the case and can you talk about the interactions you have from your seat working on the GA?
Ryan: Yeah. We’ve definitely fielded a lot more incoming calls over the past few years as more and more of these asset managers have built out their product suites, as Jim indicated, particularly in middle market direct lending variance. But there’s lots of interesting stuff out there from different types of financial or physical collateral to intellectual property, even additional managers with just traditional corporate private placements. And I expect this to continue probably indefinitely, but it’s challenging on many of these assets coming from the managers to differentiate exactly what’s underneath each hood. And often they would come in fund structures, which maybe historically haven’t been the best ALM fit for us. That’s not to say they can’t work, but like most traditional insurers, we enjoy steady, reliable cash flows. We like to understand the capital treatment that we’re signing up for. So a lot more managers approaching us and there’s really a lot more opportunity and different variants to look at.
Stewart: And you touched on something here with regard to ALM. What flavors of private credit work in relationship to LDI investing? I mean, are there particular flavors that are better suited to the liabilities that you’re trying to fund at Transamerica? Can you talk a little bit about that?
Ryan: Sure. Given that we’ve long had a diversified book of liabilities, we’ve had a diversified book of corporate private placements, and I don’t see that changing anytime soon. We’ll always have that need for duration given the liability profile. We think we’re appropriately compensated for the illiquidity and credit risk embedded there. And they’re just great assets to back many of those longer dated liabilities. In the past few years, as we’ve seen the growth of this private and more esoteric ABS sector expand, and so rapidly, that as an insurance company asset manager, it’s hard to even keep up with all the different collateral types.
So personally, I rely on Jim and team to filter them down. And because him and I have such frequent conversations, he knows which ones will be a good fit for us. And as it turns out, with this evolution at Transamerica, we also have some strategic products that are shorter duration, and we really like the opportunity here to expand in this space, taking advantage of nice base rates. And there’s a need for stable lenders like us who are willing to offer flexibility in exchange for maybe a little extra spread pickup. I think that this is an area of flexibility that an insurance company balance sheet can provide and benefit a borrower out there.
Stewart: It’s interesting. So just in case people listening don’t understand or don’t know the structure, I’m going to take a very simplistic approach here and try. So Transamerica was acquired by Aegon NV in 1999. Aegon Asset Management manages money for Transamerica and is also manages money on a third party basis to other insurance companies. So you’re getting the benefit of a lot of in-house insurance expertise that is offered externally. So Jim, if you could, can you talk a little bit about how the relationship, and Ryan mentioned that you talk frequently, I’m sure that’s the case with your other insurance clients as well. How has the relationship matured and developed since the acquisition that happened a couple of decades ago?
Jim: Yeah. I think just being involved in the marketplace, obviously you have changes that have occurred on the insurance side, but you’ve also had lots of changes that have occurred on the investment side, particularly in the structured finance market. The rotation of collateral that is being securitized over the past two or three decades changes quite frequently. And as Ryan just mentioned, this creates both opportunities and challenges in terms of backing insurance liabilities. And our relationship with Transamerica and Ryan particularly is to be in constant dialogue on what is available in the marketplace and then what can we acquire at the best risk adjusted returns, and then really work with him on either new products that they’re looking to launch or existing products, existing books of business, which offer a great fit and can provide us potentially an advantage in bidding those investments in the marketplace.
So what we’ve seen over the course of a couple of decades here is just a lot of changes, both regulatorily on what fits, but also products that are offered in the marketplace and then investment opportunities that are also offered. So this relationship that we have between the asset manager and the insurance affiliate has really worked to our benefit, but it does require a lot of active management on both sides. We need to be very aware of what’s going on on the liability side, which is Ryan’s job. Ryan’s part of the equation. And it’s really incumbent upon me to really show him some of the best, interesting investment opportunities that are available in the marketplace. And then also be flexible to know that there could be some changes on the horizon, both in the investment side or on the ALM side and make those adjustments fairly quickly.
Stewart: And can you talk a little bit about the importance of a cooperative nature of the relationship and continuous interaction versus just discretionary with a fiduciary account management, especially in private credit space? I mean, I almost want to ask you how frequently are you talking to Jim? Can you talk a little bit about how collaborative your relationship with Aegon Asset Management is?
Ryan: Yeah. I would say we’re pretty collaborative. I’ve got Jim on teams dial, and I think that’s one of the benefits of having the affiliated asset manager. You just set the constant conversation interaction. We’ve got this incredibly diverse set of liabilities and obligations to our policy holders. So the timing of these commitments and the funding needs out there, they have to correspond with our cash flows and our liquidity both in the immediate sense, 30, 60, 90 days out, for example. And I think this relationship we have, there’s a bit of flexibility embedded in the process on both sides that we’ve got this thorough understanding of the challenges and the opportunities that we both have. But equally important here I think, is that when you get into this private space where things are a bit more opaque, the manager, they need to have a little bit more patience that corresponds with the complexity of the asset here. So we need to feel comfortable with the asset we buy as the insurance company and know that it will help us fulfill our duties. And if we don’t understand the structure or the collateral or we can’t explain it to our governance committees, we probably shouldn’t invest in it. So the benefit of having an affiliated manager is that continuous interaction, understanding our asset needs. I can go to Jim in an area where we’re not necessarily active and have him help shop in quotes for an investment to fit a need or liability profile we have. I think that’s really helpful when you’ve got square peg and round hole problems. So pairing that with this rapidly evolving landscape, it’s important to me to have a manager that’s been in the trenches, one that’s experienced a cycle or two. And that’s not to say that any of us are old, but I put value on scar tissue.
Stewart: I think I’ll go with, I am a little old, but I value scar tissue too. I think that’s a great way to put it. There seems to me that there’s a real advantage in having the affiliated relationship. On a third party basis, can I expect to have that same level of interaction as though my firm has an internal affiliated asset manager like you, Jim?
Jim: Absolutely. I mean, we run one process and in those steps of the process, we’re interfacing with our clients. Transamerica being one of the largest, but our other clients are going to get that same interaction. Just based upon our historical roots of working with insurance company balance sheets, we’re going to bring that to the table every time we engage with a third party prospect or client.
Stewart: It sounds like a pretty symbiotic relationship. And many moons ago, back when the earth was cooling, I managed money on a third party basis as well. And those were my best relationships where I have a very good understanding of the business, the insurance enterprise that we are trying to fund. And I think that in your case, obviously you’ve got that symbiotic relationship and there’s so many nuances to insurance asset management, as you both alluded to. Not only are the rules changing and the markets are changing, but you’ve also got your lines of business and your capital position and tax position and whatever else to be concerned about.
Can you talk a little bit about how the PE, and you alluded to it a little bit, Jim, how PE acquisitions of life and annuity balance sheet has impacted this market? How has it impacted it from the standpoint of demand for the private ABS market? For example, are you getting squeezed out of deals that you normally would not have? Can you talk a little bit about that dynamic? And Ryan, obviously you too. How has this fairly recent change impacted things?
Jim: The PE backed insurance players are really raising the bar for private credit in really two ways. One, I think we just have to keep track of just the scale that these players are growing. They’re built upon private equity and private credit platforms, which means they’re really good at deal making, deal doing. They’re also really good at raising money, which means that the scale of those platforms is getting very large very quickly. And if you went back 10 years, there’s always been a club market for private structured finance, but the club size is now getting bigger. And the reason why you would do a club transaction is because you have certainty of execution. You have just a handful of players to interface with, so your transaction costs are a little lower. But what the private equity firms have done is they, they’ve just raised the ticket sizes of these clubs, and this may be taking collateral that normally would be out there in the marketplace being securitized, and it’s putting it in the back room, with just a handful of players getting it done upon which the rest of the world doesn’t see.
So this is an important development, but I would also say that their entrance into the market has just raised the awareness of private finance and it’s expanded the ecosystem. There are just more private transactions out there today, and to some degree, their influence in the market has been healthy for just expanding the ecosystem. Some of these large participants fall on both sides. Not only do they purchase private structured finance in the marketplace upon which we may be competitors to, but they also originate private structured finance that may be in excess of what they can internally consume. And then that creates opportunities out there for us to participate as well.
So the market is changing. Net net is it for the better or the worse? I can’t really comment on that. I think from our position, we’re seeing more private opportunities today than we’ve seen in a long time. Now, a lot of that is just macro dynamics, the rise in rates, maybe some uncertainty and execution in public and broadly syndicated markets. But I think that this private trend is here to stay and the need for insurance communities to be more invested in these private markets to fill up some of their illiquidity budget is definitely needed. And we’re seeing a tremendous amount of opportunity for sure, and the private PE players have helped in expanding this market.
Stewart: You bring up a really good point here, and it’s worth mentioning, I think with larger pools of capital chasing these deals, the critical mass to see deal flow, if you’re running money internally, that bar gets raised. I mean, if you’re not consistently in the market and you’re not consistently in the market in size, you’re just not likely to see the deals that maybe you want to see. I mean, there’s something that’s dynamic that has raised the table stakes in private market.
Jim: Yeah. Stewart, let me just add one more thing to that point. Ticket size in these transactions really does matter because naturally it lowers the number of counterparties and complexity in doing a transaction. However, issuers and arrangers, both in the private markets need to balance another dynamic, which is they need to include investors that really have specialized knowledge in a particular asset class or a particular transaction. And by including sophisticated investors, regardless of their ticket size, you really are introducing into a transaction value added players who can add to the structuring, provide feedback around the pricing, provide confidence in the execution of a transaction. And this really goes back to what we started off in the podcast with the sophisticated skill sets of private placement professionals, mostly in insurance companies today, or insurance led asset managers that can really be beneficial to the private placement market.
Stewart: It has been incredibly helpful, and I can’t believe we’re getting close on time here. I’m going to ask each of you, I’m starting with Ryan, what’s a takeaway that you want our audience to leave here with?
Ryan: Yeah. I think one thing I’d take away is that when you think about private assets and insurance companies in general and managing those liabilities, we all need to be risk managers here and understand what we know, what we don’t know, and then I think we need to lean on those that are good at what they do. So you don’t go into private asset classes blind chasing the last few basis points. Go into them because you’ve done your research. You understand that you can be compensated for the illiquidity you take on, the structuring you provide, or just keeping private, private.
Stewart: Great. How about you, Jim?
Jim: Yeah. I would just add that a lot of the benefits that you get in private assets, particularly private structured credit, comes from the work that goes into it. It’s the sourcing it. It’s the underwriting that you put into it. It’s the confidence of knowing exactly what is under the hood of your investments and being able to articulate that to your clients.
I think it’s really important to take some of these offerings and run them through multiple lenses within an asset manager because structures are designed to be creative and solve problems, but they can also create or transform risks that look attractive in one setting. But if looked through a couple of different lenses may not be as attractive. So this is one of the things that we really try and work hard at Aegon Asset Management, is to take an offering and say, okay, if you securitize it, how does that look relative to the marketplace and where we can access risk in some other format. If it was structured like a bank loan, if it was structured like a private placement corporate is, are we really transmuting equity risk into bond risk and are we getting paid appropriately for it? So this is one of the things that I think Ryan hit on, which is slowing the transaction down so that we can run those traps and really look at a transaction from multiple angles to make sure that we’re just getting the right risk adjusted returns for it.
A lot of these assets take more work and more labor to manage over time, but what we have found is that the long-term benefits are outstanding.
Stewart: That’s fantastic. I have learned a tremendous amount today. Thank you very much for being on. We’ve been joined today by Ryan Patterson, head of investment strategy at Transamerica, the general account there, and Jim Baskin, head of US Private Structured Finance. Guys, thanks for coming on. Thanks for taking the time.
Ryan: Thanks Stewart. Appreciate the time.
Jim: Thank you.
Stewart: Thanks for listening. If you have ideas for podcasts, please shoot me a note at firstname.lastname@example.org. Please rate us like us and review us on Apple Podcast, Spotify, or wherever you listen to your favorite shows. My name’s Stewart Foley, and this is the InsuranceAUM.com podcast.
Recorded in September 2023
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