Role of Sustainable Infrastructure in Private Credit with Brad Dyslin and Eric Kirsh (current/former CIO Aflac Global Investments) and Justin DeAngelis (Partner, Denham Capital)

Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, I'll be your host. Welcome back. We've got a good one for you today, the heavyweight edition. Today we're going to be talking about the role of sustainable infrastructure in private credit. And in particular, how it applies in an insurance framework. And we're joined by a serious panel here. We've got Brad Dyslin, who is the executive vice president and global chief investment officer, and also president of Aflac Asset Management. Brad, thanks for being on. That's a mouthful of a title, but we're happy to have you.

Brad: Thank you, Stewart. It's great to be here. Looking forward to this.

Stewart: Yeah, it'll be fun. And we're also joined by the person who was in the seat prior to you, we've got Eric Kirsch, who is the former executive vice president, global chief investment officer, and president of Aflac Asset Management. Eric, and a long longtime friend. Eric, welcome. Thanks for being on.

Eric: Pleasure to be here, Stewart. Pleasure to be with my partners, Brad and Justin as well. Thank you for the opportunity.

Stewart: And last but certainly not least, we're joined by Justin DeAngelis, who is the partner and co-head of sustainable infrastructure at Denham Capital. Justin, thanks for being on.

Justin: Thanks Stewart, and Brad and Eric, thanks for taking time out to do this today.

Stewart: It is great to have you, this crew, on. I don't know how lively it's going to get, but we'll start with Eric. Can you talk a little bit about your view of the insurance market today? And I think you have a very good seat to talk about how it's evolved and then where you think we might be going.

Eric: Sure. Thanks, Stewart. That's a great opening question and I'd like to think I have a long-term perspective on it. And by way of background, I got involved with insurance investing for insurance companies back in 2002, back at Deutsche Asset Management. We acquired Scudder that had an 80 billion book of insurance assets. So I quickly learned what it meant to run money for an insurance company. And I think there are a few principles that were there then and are still there today. But I'll use that as a lead into why it's become much more sophisticated.

Certainly, all insurers are always concerned about credit quality, asset liability management, liquidity management. Ultimately there's a policyholder funds, it's a highly regulated industry. So those principles have always been dear. But if I go back to the early 2000’s when I got involved, most insurers were public investors, public markets, corporate credit, perhaps the mortgage market and private markets. Mostly things like commercial mortgage loans. Certainly looking for yield and income with always diversification, high credit quality asset liability management as key principles.

And all insurers prided themselves, as they should, on good credit underwriting, making sure your assets are safe and by and large, most insurers did it well. But we know when we went through the financial crisis, some did it better than others and a few insurers had some challenges. But I think somewhere in the 2010 area, if you will, and on the market began to change. And some of those changes were tied to the era of low yields, because interest rates went very, very low. And insurers typically need net investment income, life insurers and annuity insurers need that extra spread in income. Health insurers want stability, different objectives. But in an era of really low rates, insurers began to look elsewhere for investments beyond public markets.

Now the good news about that, insurers recognized, particularly in the life insurance space, the health space, they had long duration assets for the most part. And liquidity could be handled from premiums coming in and having some assets that had natural maturities. But we went from being just asset liability guys to, "Hey, we are a huge pool of capital in the world, actually, one of the largest. And that capital can be used for making innovative investments, new investments beyond the public markets." And that's where private markets have come in.

So good examples of that are things like what we'll talk about today, infrastructure and sustainable infrastructure. The world is changing and the technology driving the world like renewables and things like that will drive change. And insurance companies have realized with long liabilities, liquidity taken care of, you can actually invest in those markets and be a natural provider of capital. Get an excellent return, maintain your high discipline of credit underwriting, get the terms that you want, yet get into these new types of asset classes that will really add a lot of value. And of course, you're going to want risk management around that, the right balance of public markets and private markets.

But I see that evolution as important to the capital markets and providing fuel, if you will, to private markets. And very often private market asset managers or providers are actually knocking on the door of insurance companies today, saying, "Is there a way to partner and attract your capital?" And that's very different than 23 years ago when I first got involved with insurance investing.

Stewart: Yeah, it's changed so much. It's so different today and so much more varied and dynamic. And so Brad, I mean there's smart money insurance shops out there, no doubt about it. Aflac is top of that list. You're innovative, you're at the front end of trends. Can you talk a little bit about private credit and sustainable infrastructure in particular and what you're doing at Aflac?

Brad: Well, everything you just said, private, sustainable and infrastructure, those are three very important boxes for us to check. And that's what this relationship does as well as a few more things. Infrastructure is a natural for insurance company portfolios. As Eric alluded to, we are very heavy credit investors. And sustainable infrastructure, if structured correctly, you can have a very solid asset that has very strong credit fundamentals that will support your debt and guarantee that you can get a nice solid credit profile off that asset. Because it will be highly structured oftentimes, and because it's private, that usually means additional yields. And well, all fixed income investors like additional yield, but insurance companies especially so by the nature of the way we book our income.

And then sustainability, that's simply where the puck is going regardless of whatever view you may have either politically or economically, it's clear that the world is going to continue to demand more energy. And all of the future production is coming from sustainable sources. So it just made sense for us at the confluence of those three things to enter the discussions we had. When we were first introduced to Denham. We were very aware of all of these trends and it just came together very nicely for us.

Stewart: That is really helpful. And you mentioned Denham Capital, Justin, everybody knows who Aflac is. Maybe Denham's not as much of a household word. Can you talk a little bit about Denham and where you are active in the capital markets today?

Justin: So Denham actually has been around for almost 20 years now. We came out of a Harvard Management Company about 20 years ago. To date, we've raised about $12 billion. And we position ourselves as a global energy transition investment firm, which today for us is really two primary sectors of focus, metals and minerals, that are part of the energy transition. So think about all the different metals and minerals that are going into wind turbines and electric vehicles. And then the group that I co-lead, which is sustainable infrastructure. Within sustainable infrastructure today we're managing about $3.4 billion.

Stewart: Justin, that's a very helpful background. So Brad mentioned the relationship with Denham. How did that relationship happen or what was the catalyst for it?

Justin: So we had historically been an equity investor. We had within sustainable infrastructure, we've built projects all around the globe. We built some of the first renewables projects, frankly, starting about 15 years ago. As the power market evolved and sustainable infrastructure evolved beyond just windmills and solar farms, we were asking ourselves, how could we provide additional products to our investors that leverage our stakeholders? That leverage our skillsets of building projects around the globe?
I mean, we were not credit investors, but we were mobilizing a significant amount of credit in all of these projects that we were building. So we asked ourselves, what do we do to accelerate that platform? And then we went about looking for a partner and aligned quite well with where Aflac's thought processes were at that time a couple of years ago now.

Stewart: Brad, what did that look like from your side of the table?

Brad: Well, at this point we had a history of linking our portfolio allocations to form some equity partnerships. So we had been doing this with a couple of other asset classes. Infrastructure was getting a fair amount of attention as we were contemplating the optimal way to increase our allocation there. And that's when we were introduced to Denham. And a lot of things resonated very well with us as we got to know Justin and the rest of the team there.

The first one is their background. They have a long history as a private equity investor actually developing, building, managing, operating very technically complicated assets. And that we thought was a very important differentiating factor in getting into this business, is having a partner who knows the ins and outs of the asset. Because ultimately that's what we're turning to for our credit worthiness. There is an asset generating cashflow. If it's not functioning, not generating cash, we've got a real problem as a credit investor to that.

So that was one of the keys as we were in discussions with them is their track record in the space. The fact they bring a lot of technical knowledge. And we think there is a notable distinction in terms of originating deals when you've got somebody who's been in the market developing these assets and has the relationships. And we bring the financing to the technical experts as compared to technical experts coming to financiers, and saying, "I've got a project need, can you go get me a syndicated financing deal?"

We think there's an opportunity to get enhanced value through being more selective, having good strong relationships, being able to structure our deal appropriately for the nature of the asset, as well as just having that ground-up fundamental technical knowledge. We think you combine all of that and it gives us an edge in each of the loans that we make.

Stewart: It's interesting. It does seem, Justin, that if you'll pardon the pun, there seems to be a tailwind for infrastructure right now. You had mentioned that you've been doing it for 15 years, it feels like I'm late to this party. What's the current situation in the sustainable infrastructure market today? Where do you see opportunities?

Justin: You're 100% right, and it's only increasing. So again, part of our step back was there's a forecast of $150 trillion that needs to be spent to get to net zero over the next 30 years or so. Most of that capital is going to come from financing, from debt, from credit. So we saw this opportunity again, and how do we leverage our expertise? But then as we also looked at the quality of the credit, it's amazing, especially on the infrastructure side, you're talking about default rates that are 6 times lower than non-financial corporates.

So it's a very strong credit there. That's also delivering, we estimate, at about a hundred basis points spread over public utilities of the same credit quality. So we like those aspects. And this was all before the US Inflation Reduction Act that was passed about a year ago now, and I'll get to that in a second. But what we also saw was that in the private space, the banks really dominate the market. About 90% of the loans over the last 6 years, about $80 billion was all coming from the banks.

So then you have the banks and say, "Okay, the banks have increasing pressure on their balance sheet." And again, this is all pre-IRA, Inflation Reduction Act. "And on top of that, they have $46 billion of refinancings that are going to come due in the next six years." So you've got the banks as the primary financing party under pressure with a lot of refinancing opportunities, weak balance sheets. To us, we saw this as a great opportunity to step in, leverage our relationships, leverage our underwriting, and go.
And then last year the Inflation Reduction Act was passed in the United States that Goldman Sachs estimates will mobilize over $3 trillion of capital investment over 10 years. So the first question on that is, "Okay, well that was a year ago. Its policy, does it really matter?" And a year hence, you've got about 270 new clean energy projects that are going to mobilize in one year $130 billion. There's been a doubling of the manufacturing and construction spending since 2021. Since then, 40% of all due jobs are in the clean energy sector.

And another added benefit, actually last year, over 50% of those new clean energy jobs have gone to women. So not only have you had this expansion in capital deployment at pace, it's also creating a more diverse labor poll. And the interesting part here is even though you had this IRA that's going to mobilize all this capital, Brad hit on it, the reason why sustainable infrastructure is catching on at the break net pace it is, isn't necessarily just because of the Inflation Reduction Act, which has created a tremendous amount of fuel to the fire. It's because wind, solar, battery storage are the cheapest form of infrastructure that happens to be sustainable. And then you have electric vehicles coming down materially, costs, which are also picking up pace here.

Stewart: That's tremendous. So Brad, when you look at all of the opportunities in front of you, what is it about sustainable infrastructure that you're so bullish on? What are some of the just straight down the middle common sense ways that makes sense?

Brad: There's a few things that align really nicely that get us excited for the opportunity here in sustainable infrastructure. The first one is the track record of infrastructure assets generally. Default rate, the loss rate is actually much stronger than comparably rated public investment grade bonds. So it's hard to beat that. Because these are private, oftentimes highly structured assets, we also get incremental yield. So at this point I'm getting paid more for less risk. What's not to like?

And then the sustainable infrastructure part, the sustainable part, I should say sustainability does have a role in our portfolio. We do believe that that's where the future for energy is. We believe that it's also important to do the right thing for society and for the planet. And if you can do those things and have higher return and less risk, it really does make it a no-brainer.

Stewart: Absolutely. That makes total sense to me. So back to you, Justin. This is available only through private markets, is that right? Can you talk to me a little bit about accessing this market? If I'm sitting in Brad's seat at another insurance company, what does that look like for me?

Justin: If you're looking for access to sustainable infrastructure, broadly speaking, and we focus primarily on projects, it's really only available in the private markets. The last time a public market sustainable infrastructure project bond was issued was 10 years ago. So it's really a private market play. Eric hit on a lot of these tenets when he opened here for insurance companies. What you get is, first of all, we've talked about sustainability, but what I haven't highlighted is the fact that everything we do goes through a sustainability screen.

Sustainable is not an adjective that we take lightly and we actually screen everything against the EU taxonomy for sustainable finance. And for those folks who don't know, it's really the most defined area for sustainability because a lot of people wave their hands and say ‘sustainability’. We also do external benchmarking as well.

But as you're looking at really what could be on your balance sheet, you're talking about low cost assets, low cost, they're critical infrastructure to the counterparties in which we're supplying electrons, if it's a power plant. Mostly inflation protected or inflation indexed in those cash flows with good counterparties. And in our portfolio, 80% investment grade counterparties where you have this very good or very low default rate that Brad and I had both mentioned. So you've got duration, you've got good credit quality, and you have sustainability benefits on top of that. Plus, because it is private and some managers work really hard to originate and structure great deals, you get a bit of excess yield compared to public equivalents.

Stewart: And when I'm thinking about this, is this an IG market? Is it a high yield market? Talk to me about how I should be thinking about that fitting into my portfolio.

Justin: So the private credit market and sustainable infrastructure is both investment grade and high yield. You can get both exposures there. And we do a little bit of both. What I just highlighted earlier was really the investment grade credit quality. You have long-term contracted cash flows with good counterparties lead them. So no commodity risk or limited commodity risk lead themselves to good investment grade credits.

You also have a high yield business around this as well, where people are looking for stretched senior opportunities or maybe there's a blend of construction risk into the portfolio. We see this all the time as an equity investor as well, Denham sustainable infrastructure equity, where you have counterparties who really don't want equity dilution but aren't really able to get rated investment grade credit. So there is this high yield / mezz opportunity set. I mean, you really have the full gamut here.

Stewart: So Eric, you're not an insurance investment guy day-to-day anymore. You have been incredibly active and supportive of your alma mater, Baruch College, and you and I have talked about this kind of stuff in the past, and I can't let the opportunity go with this panelist without asking this question. So at our symposium, there was an hour and a half session, insurers only, and I wasn't in the room because I'm not an insurer. So I was told that half of the discussion was around recruiting talent.

And as you know, and Brad knows, and Justin knows, insurance asset management is at least one order of magnitude more complicated than pretty much any other institutional class, right? And we need the best and brightest talent available. How do we excite young people to come into the industry that's been really good to all of us in insurance asset management?

Eric: Back in the early 2000s and perhaps beyond, insurers were recruiting very good folks out of many schools. But it was a limited opportunity set, because it was just traditional investment markets, a lot of sophistication around ALM and things of those natures. But now as the world of capital and investing has enlarged, particularly with private markets, and you're in school and you're thinking about a career, you might think private equity. You might think investment bank. Because you think, "Gee, that's sexy. That's where those assets may exist or those opportunities."

Well, not true at all in those places. Remember, they have a funnel, so not everyone's going to be qualified to get into those firms. But insurance investing now is touching all of those asset classes. Our discussion today, sustainable infrastructure, not something we would've discussed 20 years ago, very important to society, very important to the future and important investment asset class. Insurers do invest in private equity funds. Insurers invest in other forms of direct credit.

So if you're a young student thinking about a career in finance asset management, what a better place than an insurance balance sheet to potentially get exposure to these sophisticated asset classes. And insurance companies offer that now as a venue. So I think it's very attractive for young folks coming out of school. And it's an advantage from my standpoint when we're out attracting potential interns and young folks to join us because of that level of sophistication.

Stewart: Brad, what about recruiting? Is that something you want to talk about or we don't have to.

Brad: I'll share an anecdote that I think might be kind of interesting. I guess it's been a while now, but heading up to the crisis. I remember among peers, a lot of insurance company analysts and PMs were leaving the industry to go work for hedge funds, total return funds. That's where all the smart money was going. And the insurance companies, we were the dumb money. All we did was buy bonds and sit on it. And then we had this little crisis that happened, and a lot of those PMs and analysts were without jobs as their capital sources dried up because returns were no longer there.

And those of us at the insurance companies didn't look quite so dumb anymore as we were not only just first of all still employed, but we now had capital to pick up the pieces that they were having to liquidate to meet their withdrawals. And now you fast-forward another 10, 12, 15 years, whatever it's been, and where is all the private equity focus right now?

The larger, more sophisticated private equity firms are out building or buying or both insurance companies because they like the characteristics of the insurance company capital. Well, that's been our secret for most of our careers. And I think the biggest thing to attract in talent is just getting that story out, making sure folks understand and appreciate not just the breadth, but the depth of opportunity that exists in insurance company asset management.

Stewart: Yeah, I couldn't agree more. And I have been beating this drum for so long. I just think it's such a great... I mean, you think about the level of sophistication from when you go to work at a shop like Aflac, and there's others that are also very sophisticated, very smart money. I think if you listen to some of our podcasts and you listen to this one in particular, you come to realize that insurance companies are very smart money and terrific places to spend a career.

So Justin, you mentioned Denham starting out as an equity shop and now you've got this partnership with Aflac in private credit and sustainable infrastructure. How did you get from point A to point B there?

Justin: So we actually now have brought on six people exclusively focused on sustainable infrastructure credit. We're still leveraging clearly the platform that we have. And in that six people includes a gentleman who we picked up from Allianz who managed their Americas infrastructure business for many years. And then around him, we've added really project finance professionals, including a gentleman who financed the first offshore wind farm in the US.

And then we did that. We had this partnership with Aflac. And over the course of time, we've been able to mobilize about $700 million into really an investment grade portfolio that we're really happy with today with significant pipeline behind that. And I want to emphasize too, that's before even the full impact of this Inflation Reduction Act and really the exponential growth of sustainable infrastructure.

Stewart: I really think that the Inflation Reduction Act has... I don't know. I think that more and more people are aware of what's in there, but it's a big deal. Is that fair to say? Particularly for renewable energy? It is a big deal.

Justin: It is a big deal. And we normally don't, you would be hard-pressed to go find podcasts, interviews, presentations where we talk about policy. This is the first time that we've ever had a significant emphasis on policy. It is big for renewables. There's another part of it that we're actually not going to finance, but it's also very interesting. The Inflation Reduction Act looks to re-shore all kinds of production capacity for windmills and solar panels, which is a significant threshold shift that the United States has taken. And if we are a global investor, you look around the globe, every other major economy is now trying to play catch up for the first time with the United States.

Stewart: That's fantastic. I love that. So here's a round-robin closing question, and this is going to have to be fast. In the interest of time, you can choose either or both. Are you ready? Here we go. And I'll start with Eric, because I know that this'll be a good answer. So maybe we'll change it up a little bit. Best piece of advice you've ever gotten? And who would you most like to have lunch with, alive or dead? You don't have to take them both. You can take either or both.

Eric: I'll do the second, and that would be lunch with John Lennon.

Stewart: Oh, very cool. How about you, Brad?

Brad: Best piece of advice I've received is early in my career, a mentor told me, "When presenting, nobody ever said, 'Man, I wish he'd have kept going on and on and on and on.' Get to the point and finish it."

Stewart: I like that. That is good advice. How about you, Justin? Are you brave enough to take on both?

Justin: I'll take on both.

Stewart: I love it.

Justin: Don't be emotional about the analysis. Trust in the numbers. And I'd like to have a dinner with my great-grandfather who was an immigrant to the US.

Stewart: Oh, that's great.

Justin: I'm curious what was in his head to leave his country to come here.

Stewart: That's a great one. That would be a great conversation.

Brad: I'd join both of them for their respective dinners.

Stewart: Absolutely.

Eric: And vice versa.

Stewart: Absolutely. Absolutely. We could just have it all in one group. It would be a good one. It'd be a very good one. Well, thanks for being on. We've been joined today by Brad Dyslin. Brad is the executive vice president and global chief investment officer and the president of Aflac Asset Management. Brad, thanks for taking the time. It's been a pleasure.

Brad: My pleasure.

Stewart: And we've been joined by Eric Kirsch, who is now retired, but was recently the executive vice president, global chief investment officer, and president of Aflac Asset Management. Eric, it's always good to see you and great to have you on. Thanks for taking the time.

Eric: Same here, Stewart. Thanks for having us and keep up the great work you're doing; terrific for the industry.

Stewart: Thank you so much. And Jus DeAngelis, who is a partner and co-head of Sustainable Infrastructure at Denham Capital. Justin, thanks for taking the time.

Justin: Thanks, Stewart, appreciate it.

Stewart: Thanks for listening. If you have ideas for podcasts, please shoot me a note at podcast@insuranceaum.com. Please rate us like us and review us at Apple Podcast, Spotify, or wherever you listen to your favorite shows. My name's Stewart Foley, and this is the InsuranceAUM.com podcast.

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