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US private equity investor J Christopher Flowers has warned that a dramatic increase in private credit investments by life insurers is creating systemic risk for investors.
Flowers, who attempted a rescue of insurer AIG during the 2008 financial crisis, said investors were underestimating the risks resulting from a flood of money into private credit loans and a push by insurers into these assets in search of higher investment yields.
“Too many people have piled into private credit and it has a special feature that a chunk of it is funded with life insurance assets,” Flowers told the Financial Times. “One of these days, some life insurance company is going to get whacked on their private credit . . . You can have a run on a life insurance company.”
Assets managed by private credit investment funds have grown to a record $1.5tn, with annual growth more than doubling to 23 per cent between 2020 and 2022, according to JPMorgan. Fuelling the industry’s rise has been a push by private equity groups to manage insurance assets.
Over the past decade, many of the world’s largest private equity firms, such as Blackstone, Apollo, Brookfield, KKR and Carlyle Group, have acquired or partnered with life insurers as a means to invest broader portfolios of credit-oriented assets. These private equity-backed insurers have increased investment into private credit assets such as securitised products, private debts, and lower-rated loans.
Moody’s recently found that private equity-owned insurers have invested $102bn into asset-backed securities, nearly a third of their total bond investments and about triple the exposure held by the broader insurance industry.
Flowers said he was concerned about the overall growth of private credit assets, which are mostly managed in private and public investment funds, but thought a “systemic” issue or company blow-up would probably come from an insurer holding too much of this debt.
Policyholders of life insurance products can withdraw their assets, creating the conditions for a “run on the bank” if loss rates were to rise in private credit portfolios and scare investors, said Flowers.
“It is where private credit growth and a run with other people’s money could actually happen. No one’s really paying attention to it,” he said. “Somebody is going to get zapped . . . probably more than one firm, and it will be a rude awakening for investors.”
Earlier this year, Eurovita, a private equity-backed insurer based in Italy, was placed into special administration after it was stung by heavy withdrawals from policyholders seeking higher interest rates. Its failure has led to concern over the health of other private equity-backed insurers after a swift rise in interest rates.
Flowers in 2013 acquired a majority stake in Eurovita before selling it four years later to UK private equity group Cinven. When interest rates rose sharply last year, Eurovita’s investments fell in value, hitting its solvency and causing a flood of withdrawals.
Flowers’ investment firm, JC Flowers & Co, is known for buying troubled banks and pools of distressed loans. A former Goldman Sachs partner who left the investment bank before its 1999 flotation, Flowers founded the group 25 years ago and has since invested over $17bn in the sector.
He is best known for turning around troubled lender Long Term Credit Bank of Japan in the early 2000s and for making a wave of distressed investments in the wake of the 2008 financial collapse. However, some of Flowers’ investments suffered losses during that time. His most recent fund, raised in 2022, was less than half the size of a similar fund raised in 2009.
Flowers said he was surprised by a US regional banking crisis that erupted in March. He declined to participate in a last-ditch $500mn equity infusion into regional lender Silicon Valley Bank before its quick collapse, but was part of a private equity consortium that tried unsuccessfully to buy the lender from the Federal Deposit Insurance Corporation.
Flowers in recent years has found success backing UK financial firms such as online brokerage Interactive Investor, which was recently sold to Abrdn, and the challenger bank OneSavings Bank.
He described the UK as a good investment opportunity. “People are so negative about the UK right now so things are cheap . . . it might be a great time to invest,” said Flowers.
