Katie Cowan
Private credit has become a permanent part of institutional portfolios. As allocations have grown, however, so has the complexity of evaluating them. The question is no longer whether private credit belongs alongside traditional fixed income. It is how investors distinguish between yield that simply compensates for taking more risk and yield supported by durable risk management that investors can understand and assess.
That distinction matters more than ever. As competition for deals has intensified and as private credit strategies have expanded well beyond traditional direct lending, investors face a wider range of managers, structures and underlying risks. Two portfolios with similar headline yields can have fundamentally different downside characteristics.
From an insurance perspective, those differences are where investment decisions begin.
Insurance companies’ investment objectives extend well beyond simply maximizing yield or return. They must generate dependable income while preserving capital across multiple economic and market cycles. That discipline has shaped an investment approach that offers useful lessons for pensions, endowments, foundations and other long-term allocators evaluating an increasingly diverse private credit landscape.
Look to the Sources
Headline spreads rarely tell the full story.
Two loans offering similar returns may differ materially in quality, documentation, covenant protections, leverage and structural seniority. Those characteristics often determine outcomes when markets become stressed.
Rather than evaluating yield in isolation, institutional investors should examine a loan’s risk architecture—the combination of origination, collateral, covenants, priority, portfolio construction and active oversight that ultimately shapes the potential for downside risk mitigation.
Sometimes, higher spreads compensate investors for accepting greater credit risk. In other cases, they reflect structural complexity, illiquidity or specialized underwriting expertise, each of which can create barriers to entry. Distinguishing between those sources of return requires looking beyond top-line yields to the quality of the underwriting, structural investor protections and ongoing risk management.
Testing Portfolios Against Multiple States of the World
Insurance investors rarely construct portfolios based on a single economic forecast.
Instead, they evaluate how investments are likely to perform across a range of potential outcomes. What happens if markets tighten? How resilient are expected cash flows if growth slows? How vulnerable is collateral in more adverse conditions?
Rather than relying on a single macroeconomic forecast, this approach recognizes the limits of forecasting and focuses instead on building portfolios capable of performing across multiple environments. By distinguishing between measurable risks and the broader uncertainty inherent in investing, it emphasizes resilience more than prediction.
Scenario analysis also encourages investors to challenge assumptions before markets do it for them. In periods of stability, this discipline can reveal vulnerabilities that traditional performance metrics may overlook.
Risk Management Key in Manager Selection
As private credit has expanded, so, too, has dispersion among managers.
Managers differ not only in sourcing capabilities, but also in underwriting discipline, documentation standards, portfolio construction, workout experience and ongoing surveillance. Those differences become most visible during periods of stress.
Institutional investors therefore need to evaluate risk management as part of the due diligence process, rather than as a point-in-time underwriting decision.
These kinds of manager capabilities rarely appear in performance statistics, yet they often separate managers who preserve capital during difficult periods from those for whom historical performance was largely the product of favorable market conditions.
Risk Management Should Expand Opportunity, Not Limit It
Risk management is often viewed as a defensive exercise focused on avoiding losses. In practice, it is much more than that.
A disciplined understanding of risk builds the foundation for selective investment when opportunities become more attractive. It allows investors to differentiate between compensation driven largely by market beta and compensation created by complexity, illiquidity or specialized expertise.
That has long been the insurance industry’s approach to credit investing.
As private credit continues to mature, success for investors is likely to depend less on identifying the highest-yielding opportunities than on understanding the risk architecture that supports those returns. For institutional investors, adopting an insurance mindset means building portfolios designed not simply to generate income in favorable markets, but to preserve capital and remain resilient across a range of market environments. That discipline has long guided insurance investors, and it may become increasingly valuable for all categories of institutional investors as private credit continues to evolve.
Katie Cowan is the head of insurance client solutions at First Eagle Investments.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of ISS STOXX or its affiliates.
Tags: Asset Allocation, dispersion, Insurance Asset Management, Private Credit, Risk Management