Aflac Deal Highlights Rise of Private Credit

What You Need to Know

Private credit income returns have exceeded 8.9% per year since 2005.
Aflac just bought a 40% stake in a private credit asset manager.
One challenge: Popularity.

Aflac announced last week that it’s acquiring a 40% stake in Tree Line Capital Partners, a private credit asset manager.

The life and health insurer said it will be allocating a “portion of its annual investable cash flow” to Tree Line’s private credit lending program.

The deal raises the question: If Aflac likes private credit investments, should individual clients be considering direct or indirect investments in that asset class?

What it means: Maybe the private credit market is now so popular no one goes there any more, but maybe there’s still room for individual investors.

Private credit basics: The term “private credit” refers to many different types of direct lending provided by private equity firms, alternative asset managers and other non-bank financial institutions.

Unlike traditional corporate bonds, the securities related to private credit arrangements cannot be resold to ordinary public investors and may be more difficult to convert into cash.

In some cases, private credit arrangements can involve private placements of debt issued by large, highly related companies, according to a guide prepared by Voya.

The term can also refer to arrangements for investing in pools of senior loans issued by midsize companies, pools of debt securities issued by struggling companies, and pools of “mezzanine debt,” or debt arrangements designed to be more secure for the holders than stock but lower on the repayment priority list than senior debt.

The market: Peter Windsor, a senior financial sector expert at the International Monetary Fund, told the National Association of Insurance Commissioners’ International Insurance Relations Committee in March that the IMF believes that firms have about $1.5 trillion in private credit-related assets under management, including about $800 billion in private credit investments and about $400 billion in cash, or “dry powder,” stored in the private credit funds.

The private credit market is growing partly because of new bank capital requirements that are encouraging banks to be more cautious, and partly because, until about two years ago, the interest rates investors could earn on traditional corporate bonds and similar types of investments were very low, Windsor said.

Life and annuity issuers are especially appealing as private credit providers because they have plenty of cash to invest and a long commitment horizon, Windsor said.

Fitch Ratings estimated in November that exposure to private credit at the U.S. life and annuity issuers it rates averages about 5% of the value of their fair-market value assets.

Voya argued that liquidity in the private placement sector of the private credit market is strong, because the agents that handle most of the deals help act as market makers, and because about $4 billion of private credit assets are traded in a typical year.

The mood: Conning, a firm that helps insurers manage their assets, reported in January, based on a survey of about 300 U.S. insurance company investment decision makers, that about 56% intended to increase portfolio allocations to private placement arrangements and other types of private credit arrangements.

The J.P. Morgan Private Bank U.S. family office practice head recently noted that many family office clients already invest in private credit along with private equity, venture capital and hedge funds.

Regulators are looking at the rapid growth in the private credit market and wondering if that’s something they should think about.