Transfer Window
Or: why Europe’s insurers are becoming its lenders
Last week, the people who manage Europe’s insurance capital gathered in London for Insurance Investor Live | Europe. The pool is roughly €10 trillion.[1] Whatever the panel titles said, the question in the room was the one this series has been circling all year: “who lends to the real economy now that the banks have stepped back?”
Last month, in Computer Says No, we walked through the machinery of that retreat. This issue is about the balance sheets that could fill the void, with a regulatory tailwind at their backs and, from January, a window about to open.
The scale of what needs funding is massive. The European Investment Bank puts the EU’s annual SME funding gap at €325–500bn.[2] The Draghi report puts the digital, social and sustainable transition at €750–800bn a year.[3] Infrastructure estimates run €250–750bn annually, depending on how much of the transition you count.[4] Numbers that size are not financed by fund vehicles alone. They are financed, if at all, by institutions with permanent liabilities, and Europe has exactly one set of those at scale.
Vertis originates credit. Henry Costa Partners, our sister company, structures and distributes it to insurance capital. Two companies, one strategy, built for exactly this moment. Our conviction is that Europe’s version of this market cannot copy the American one, where manager and balance sheet sit under one roof and insurers are asked to buy assets from firms that compete for their liabilities. We are building the other way: “open source” rather than captive, in Europe for Europe, independent of any single balance sheet and useful to many of them. This issue is the first of several on insurance between now and the end of the year. October takes on opportunities relating to Matching Adjustment balance sheets.
This piece was co-authored with Jerome Delposen, Partner at Henry Costa, who structures assets for insurance balance sheets and chaired the asset allocation theatre at the conference. The six questions at the end go to a very experienced European Solvency II life insurance CIO, who has spent a career on the other side of that table and answered off the record.
A note on intent: We write the Credit Observer to sharpen our own thinking and to hold ourselves accountable to the standards we set. Jerome Delposen is a Partner at Henry Costa Partners, our sister company, and the lower mid-market lending discussed below is the market we are active in via Vertis and DunPort. We are active participants in the market and are building our business alongside “high conviction” asset classes. We welcome feedback and debate.
The Other Balance Sheet
The story is usually told as bank retrenchment, a term we called overused only last month, and the correction bears repeating: the lending did not stop, it moved. The starting point is extreme by American standards: banks still intermediate roughly three quarters of European corporate credit, against about a fifth in the US.[2] Post-crisis regulation made risk expensive inside banks, and the risk went looking for alternatives. For a decade the main destination was the traditional co-mingled closed end private credit fund. The fund model has served the move well, but it also has severe limitations to cater for duration, transparency, look through reporting as well as a drag from undrawn capital.