NN, the €140 billion, 180-year-old Dutch insurance group headquartered in the Hague, is the latest long-term investor to flag concerns in private credit.
Marieke van Kamp oversees NN’s €50 billion allocation to private markets which spans a large allocation (around 60 per cent) to Dutch residential mortgages alongside smaller real estate, infrastructure and private equity and debt portfolios. These Europe-focused allocations have been steadily built out since 2010, fanned by low interest rates and NN’s long-term liabilities and comfort holding illiquid assets.
Van Kamp observes that many investors have jumped into private credit and she believes some asset managers, desperate to build up their book, have not focused enough on downside protection. The large amount of capital in the market has resulted in strong competition for deals amongst managers and borrowers have become accustomed to easier lending contracts.
She doesn’t believe the shift away from bank lending to institutional lending has created more risk in the system. But she is concerned about the amount of private credit that has flowed into private equity, where private credit funds now compete with banks to meet private equity’s funding needs, lending to individual funds as well as their portfolio companies. “In private equity we are seeing additional lending taking place at different parts of the structure which could pose additional risk in the market.”
Still, she notices that the amount of private debt used to finance the M&A activity that secures exits in private equity has recently slowed down.
“The expectation with President Trump was that it would be good for business, but the large IPO and M&A market has been put on hold.”
Because NN’s private debt managers have as long as four years to deploy commitments, a crucial element of van Kamp’s strategy comprises capital planning to ensure enough liquidity on hand to meet capital calls. She says strategy is carefully shaped around working with “prudent managers” in relationships focused on valuations and an understanding that deploying money “takes time.”
The investment period is also around three to four years, which means NN gets its capital back relatively quickly. Investment involves constant reups over time in a process that is smoothed by deliberately working with a few managers in selected partnerships.
Under this partnership model, managers also share their insights on the market, offer access to a wide range of products and it’s possible to negotiate on fees. It creates a programme that is more tailored to NN’s needs with built-in flexibility like the ability to dial commitments up or down, and NN is less dependent on the investment period typical in fund investment.
In the early days, NN’s allocation to private debt comprised investment-grade corporate loans, infrastructure and real estate financing. Over time, this has gradually expanded to non-investment grade lending including direct lending to finance real estate and infrastructure investment supporting the energy transition.
“Today we have broadened out to a wider spectrum of investments and select managers that are specialists in their fields,” says van Kamp.
Dealing with an overweight in private equity
In private equity NN invests in (mostly) European closed-end funds with local and regional specialists. The private equity portfolio is overweight because of the numerator effect, whereby the strong performance of the portfolio has pushed it to the top of its band relative to other holdings.
As a result, the team have re-evaluated how they manage the allocation, choosing not to sell in the secondary market and lowering new commitments over time to get back to target. NN decided not to move quickly to halt allocations because it opens up gaps in exposure to the best vintages.
“We are 1.5 times over our allocation and decided on a middle way to re-up with managers we work with but just tweak the sizes lower. On balance we will still be present in all vintages but we will just do a little less than we did before.”
Sustainable real estate pays dividends
NN’s Europe-focused real estate allocation comprises joint ventures in funds and directly held assets. She says demand for European residential assets is particularly strong, and the allocation has a high level of churn as assets which are no longer considered strategic are sold and replaced. NN has also spent time building up strong relationships with external managers focused on partnership agreements where NN is often the seed or anchor investor.
“We get a good allocation and can also have good discussions on what’s on offer to shape the best strategy for us. In some situations, we build a strategy together with the manager. We seed the fund as sole investor at the beginning and then overtime others follow and join in a strategy we have helped tailor. We focus on a few managers, and we bring the advantage of size and large individual commitments which helps us get a good seat at the table.”
Around €13 billion of the private market portfolio is in climate solutions spanning renewables, green bonds and affordable and sustainable real estate. Drawing on her expertise in real estate (she holds a master’s degree in real estate management and sustainable development), sustainability has become a key theme and the real estate portfolio targets carbon neutrality by 2040.
“We strongly believe that integrating sustainability into real estate means we are positioning our assets for the future. They will be more resilient to climate change and attract tenant demand; banks will be more prepared to finance these types of properties, and they also adhere to regulations. It is about positioning our assets at the forefront of what the market demands.”
NN knows the GHG emissions for each property and each asset’s net zero pathway – many of the properties produce renewable solar energy and one new development has integrated biodiversity. NN has signed up to the Carbon Risk Real Estate Monitor (CRREM) which provides a framework for real estate investors and asset managers to set and manage ambitious decarbonization targets aligned with the Paris Agreement.
“We have put the portfolio on this path because it shows us what we have to do to make our investments as climate efficient as possible and how we can build this into our capex plan over time. It’s a really good programme, and ensures we take into account the refurbishments that are needed,” she concludes.
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