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Buy private equity in the secondary market, Voya’s Simone says

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Insurers scaling back from hedge funds may find better bets in securitized credit and the secondary market for private equity, said John Simone, an executive at Voya Financial Inc.’s asset-management operations.

“Insurance companies have historically felt a little bit more comfortable with the level of predictability in terms of cash flow, which is why they like secondaries especially,” Simone said Monday. “With hedge funds, it’s been very difficult to achieve those double-digit-type expected returns over a cycle in many cases. So you’ve seen a lot more people look toward private equity.”

American International Group Inc. and MetLife Inc. are among companies that have been seeking to exit some hedge fund holdings amid slumping returns. AIG Chief Investment Officer Doug Dachille is betting on investment-grade bonds and commercial mortgages, while New York-based MetLife has said it is boosting allocations to mortgages and structured finance.

By betting on private equity in the secondary market after the fund has started making investments, firms can get a feel for how the cash flow is panning out, said Simone, who invests on behalf of other insurers. Deals in the secondary market for private equity reached about $45 billion in 2015 and are expected to drop by about $5 billion or $8 billion this year, according to a report from Cebile Capital.

Securitized credit also offers an opportunity for insurers, which often focus on corporate bonds, to garner better returns. Simone, Voya Investment Management’s head of insurance solutions, said he favors residential mortgage-backed securities and sees opportunities in student loans.

“In terms of the shift away from hedge funds, I think that you’re definitely going to probably see people taking more securitized credit type risk,” Simone said. “We see a lot of value in that type of market.”

While some alternative assets such as hedge funds have placed pressure on insurers recently, Simone said firms shouldn’t be risk-averse. Companies focusing on corporate debt may miss an opportunity.

“They really need to embrace broadening their diversification into more asset classes to pick up some higher returns while still having the same level of discipline,” he said.

See also:

CEO says private equity ‘mixed bag’ for insurance

Private equity secondary market is booming

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