Normalised fund-raising environment, insurance-linked securities offer value: Schroders Capital


In an outlook on the private markets investment sector for the second-quarter of 2024, Schroders Capital Chief Investment Officer (CIO) Nils Rode explains that insurance-linked securities (ILS) are an area of value in the current environment.

The Schroders Capital CIO also highlights a much-improved and more “normalised” environment for fund-raising, with “promising investment opportunities” available in private asset classes.

Given the current geopolitical environment, investors remain attracted to allocations to private asset classes such as insurance-linked securities (ILS) and Rode explains why.

“With continuing political tensions both within and between countries and escalation risks for ongoing conflicts, diversification within private market allocations remains key,” he said.

Adding that, “As we approach Q2 2024, private markets have largely reverted to pre-pandemic levels in terms of fundraising, investment activity, and valuations, creating a favourable environment for new investments.”

Rode went on to highlight that in 2023 it was larger investment funds that benefited, but now with the fund-raising environment more normalised, “we see more attractive opportunities for small and mid-sized private market strategies,” which bodes well for ILS funds and the ILS market in general.

Rode added that, “Historically, fundraising has served as a valuable contrarian indicator. This is because most private market strategies are closed systems where fundraising levels and dry powder directly influence entry valuations and, in turn, impact vintage year return expectations.”

Which is certainly the case in ILS and we’ve seen the effects of this in pricing of catastrophe bonds through the first-half of the year so far.

Given the ongoing geopolitical turmoil around the world, Rode said that Schroders Capital believes, “It’s essential to maintain high selectivity and robust diversification within private market allocations.”

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Schroders Capital favours “investments offering high income and benefiting from capital provision inefficiencies,” Rode said.

One of which is the, “Uncorrelated income from sectors such as insurance-linked securities.”

Going on to explain how current macro dynamics are affecting asset classes, by saying, “With many syndicated markets rallying in Q4, yield spread premiums have significantly reduced, even in previously cheaper liquid markets like CLOs (collateralised loan obligations) and ABS (asset-backed securities).

“Today, most liquid markets are historically tight in terms of risk premium.

“Only Agency MBS (mortgaged-backed securities) and non-syndicated MBS/ABS as well as specialized sectors, such as insurance-linked securities, offer value.”

He added that, “Insurance-linked securities provide valuable portfolio diversification due to their lack of correlation with macroeconomic conditions and offer attractive returns due to higher yields driven by reinsurance limitations.”

Investors have a need for diversification, given the growing interest in income allocations and the maturity of private debt allocations, Rode explained.

The Schroders Capital CIO also noted that asset classes “generating cash flow” are particularly in demand which, as we explained this week, the catastrophe bond market is expected to deliver in abundance this year.

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