Against a backdrop of still attractive private market yields, improving capital markets, and evolving regulatory landscape, UK and European insurers continue to refine private market allocations with a focus on income durability, capital efficiency, and liability alignment.
We remain constructive on private credit (direct lending) as we expect private equity deal activity to continue improving. Given its defensive properties and the spread pickup available relative to public credit, private credit is particularly attractive for insurance portfolios. Real estate debt also continues to be attractive for insurance portfolios in light of a recovering real estate equity market – and considering its high current income and favorable risk-based capital treatment.
Under Solvency II (including the 2024/25 review), private credit continues to benefit from an attractive spread relative to capital charges, although outcomes remain sensitive to internal rating methodologies and consistency with external benchmarks. In parallel, EIOPA’s (European Insurance and Occupational Pensions Authority) focus on valuation, governance and look-through is sharpening supervisory scrutiny of illiquid credit exposures, particularly around model risk and the use of market-consistent valuation. Policymakers are also increasingly recognizing private credit as a key channel for financing the real economy, reinforcing the structural case for the asset class.
We remain underweight private equity, with a preference for growth and venture strategies over buyouts. Given still-high valuations and borrowing costs, the return potential doesn’t justify utilizing precious risk-based capital budget. For insurers seeking higher-return strategies, distressed credit / special situations may be a better place to deploy capital.
While we are cautious on broad real estate market beta, real estate equity is more capital-efficient than other forms of private equity exposure and we favor income-driven core strategies in this space. Another element of our real assets overweight is our positive view on infrastructure, which has strong fundamentals, secular tailwinds, and an investment profile that naturally aligns well with many insurers’ long-term investment needs.
EIOPA’s broader supervisory attention to valuation and look-through is relevant for illiquid real asset exposures, leading to increased supervisory scrutiny of valuation methodologies, transparency and underlying risk profiles. In our view, this tends to place a premium on simpler, income-generating exposures, relative to more complex or market beta-driven structures. Policymakers also increasingly view insurance capital as a natural source of long-term financing for infrastructure, providing a supportive tailwind in the context of the EU Savings and Investments Union and aligning with insurers’ long-duration liabilities.
Get an in-depth outlook on private credit and equity, real assets, and hedge funds from our alts experts, including positioning and insight on valuations, fundamentals, and trends.
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