SLC Management was an early investor in private credit, one of the first to offer the strategy to Canadian pension funds more than a decade ago.
So says Steve Peacher, president of the in-house asset manager of Sun Life, the Canadian insurance giant. As of year end 2023, SLC Management oversaw roughly C$374 billion ($283 billion) in assets.
Pensions & Investments spoke with Peacher, who worked at Putnam Investments and Columbia Management before joining SLC Management in 2009 as CIO to oversee the insurance company's general account.
Sun Life launched the asset manager in 2013 to manage funds across fixed income and alternatives.
Through acquisitions and purchases of majority stakes in managers over the years, SLC's strategies include those from Prime Advisors; Crescent Capital Group, an alternative credit firm; Ryan Labs Asset Management, offering institutional fixed income; BentallGreenOak, offering real estate; and InfraRed Capital Partners, an infrastructure fund firm.
Of SLC's $283 billion in assets under management, $115 billion reflects assets of Sun Life, while the remainder is managed on behalf of pension funds, other insurers and sovereign wealth fund clients.
"Life insurance companies invest their own money very much like pension funds, with (a) lot of fixed income and alternative investments," Peacher said.
"We for decades had an investment-grade private credit and the team invested for Sun Life's balance sheet," he said. "They added excess spread over investment-grade corporate market, but their loss ratios were extraordinarily low."
"It was a crown jewel within SLC. However, it was a new idea for (Canadian pension funds), although not new for insurance companies. Life insurance companies have been in the private placement market for decades, and were the drivers."
Starting in 2014, SLC launched a private credit fund in Canada and pension funds there used it as part of the fixed-income mix, he said. Historically, private credit added roughly an extra 150 basis points over public corporate bonds, on a comparable rating and duration, he noted.
"That extra spread ebbs and flows" between 75 to 150 basis points over investment-grade corporate bonds, he added.
In the past few years, "a number of other players have said 'we need to get into this market.' We've been copied!" Peacher recalled.
"It's exploded across the ratings spectrum. It's become standard allocation, and it will grow in this yield environment. And some of the banks have been forced to move away from this market."
In 2015, "there was really only one consultant saying 'we love investment-grade private credit, but clients aren't asking for it yet.' But more clients got interested in private credit as part of a fixed-income portfolio. It was a new idea, but it's not new for insurance companies. We've since come to the U.S. and gained traction with U.S. pensions."
Unlike public fixed income, the $1.7 trillion private credit market doesn't give investors as much transparency on ratings.
To counter that, SLC spends "a lot of time thinking about what is the rating that would go on investment-grade private credit. Sometimes there is a rating from S&P or Moody's; often there's not. We have an extensive internal rating process. We worked with S&P to develop models for different industries" using more than a dozen inputs, he said.
As SLC markets these private credit funds, clients "like that rigor. We've been able to show a long history … of low loss ratios."
Fees charged to clients investing in private credit are "higher than in high yield. It's a very labor-intensive endeavor. You have to go out and source these deals. Unlike high yield, where (Wall Street's) bringing you deals."
In addition, "there's the monitoring of the company. That accounts for the higher fees," he added, citing typical management fees of 1% and carry in the mid-teens.
Pension funds a lot of times invest in "below-investment-grade private credit and put that into the alternatives bucket."
Through its real estate investment arm BentallGreekOak, or BGO, SLC has for a number of years "heavily focused on 'all things industrial' in Europe and North America," Peacher said. "It's had tailwinds with COVID and ordering from home."
Beyond that, other sectors of interest are cold storage, data centers and specialized warehouses. BGO managed $80 billion in assets as of September 30.
Real estate's current yield of 5% was attractive when rates were at zero; it's "less attractive now that you get that in a money market. It's less attractive relative to fixed income."
"Retail we've been underweight a long time. With few exceptions, office is more challenged. We're starting to see bargains."
Underlying demand for infrastructure investments, he said, "is very strong. There's a revolution going on with sustainable, renewable energy. Wind and solar energy is very cost competitive. The challenge is around zoning. Also, battery storage is improving."
The definition of infrastructure, too, is expanding, to include hospitals, universities, data centers, charging stations and fiber optic cable, he said.
"We're seeing the needs are great, and the capital is there," he said.
What he calls "greenfield infrastructure" can generate double-digit returns, he said. "We're a major player in infrastructure lending. We lend against a lot of projects over the long-term basis, wind farms, hydro projects, buildings for energy efficiency. "
Peacher said decisions by companies such as IBM to revive their defined benefit plans is a positive "from a societal standpoint. The decline in DB pension funds has been a net negative for savers and for workers. There's a lot of benefits to DB plans, they can be lower cost, with professional management, and as a participant in the plan the company's standing behind it.
"The 401(k) is a nice vehicle, but it takes the burden and puts it on the individual. Now that the interest rate decline has run its course, it may be more conducive" to maintain a defined benefit plan. "I hope you see a resurgence" in DB plans, he said. "It fits nicely next to a 401(k)."
Peacher sees interest rates staying higher.
"I think we'll be in a period of more stable rates; like what used to be normal" for interest rates, where the 10-year Treasury settles in a range of 3% to 5% yields, or "low to mid-single digits," he said. "That will be the norm."
His personal view: "the Fed's been pretty clear they stopped raising rates and the next move is to cut. The consensus is more cuts than the Fed is signaling. The Fed will be slower to cut than many people think. Inflation has come down, but we're in this anomaly. Economic growth still feels pretty strong."
In 2024, "we're going to feel it at the consumer level and for companies that have debt tied to (the secured overnight financing rate). That has yet to fully bite."
