Episode 291: Fund Finance: Evolution, Insights, & Opportunities

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Stewart: Welcome to another edition of the InsuranceAUM.com podcast. My name's Stewart Foley, I'll be your host. Hey, welcome back. It's great to have you. We really appreciate the audience. We've got a really loyal group of folks who listen to our podcast all the time, and I get a lot of nice compliments from people over time. And I just want to just say a really sincere thank you. We try really hard to make the podcast educational. We hope that that helps with keeping everybody current on markets and on the latest trends. Speaking of which, we have a brand new event that is going to take place in Philadelphia on May 7th and 8th, which is on ABF, which has got to be the hottest asset class going right now. Real estate and infrastructure. If you are one of those folks, these are your people. Please email us at events@insuranceaum.com and we'll get a registration packet headed your way. So today's podcast is very topical and it has to do with fund finance. And the title of the podcast is Fund Finance Evolution Insights and Opportunities. And we're joined by Shelly Morrison who is the head of fund finance at Aberdeen Investments. Shelly, welcome, and thanks for taking the time.

Shelley: Thanks very much, Stewart. I'm really excited to be joining you today.

Stewart: It's fun, right? And so just in case everybody doesn't know, I mean it's great that Aberdeen is back to being Aberdeen, and what's old is new again, and we're thrilled. I think most of us in the community are happy to see you back going by Aberdeen. Can you give us just a high-level overview, overview of Aberdeen in case folks don't know, and then I want to get into your background and we'll get into the heart of the show.

Shelley: Sure, happy to. So in case listeners are not familiar with the depth of Aberdeen's experience in working with insurance companies, we do have an almost 200-year track record in managing insurance assets. Right now we have just about $240 billion of assets under management from around about 150 different insurance clients globally. And those assets are invested across multiple strategies, including a range of specialist private credit assets such as fund finance. And in fact, within fund finance, we actually established our strategy back in 2018 to meet the specific objectives of a group of insurance clients. And it has grown since then.

Stewart: That's terrific. And I want to get into your story a little bit. Can you tell us where you grew up and maybe get us from your first job to where you sit today? What was that journey like?

Shelley: Oh goodness, that's a great question. So I grew up in England, in a small town just outside of Cambridge, very traditional British upbringing. Finance was never the original career plan - that was a bit of a curve ball. So I went to university and actually studied a geography degree, so I was more interested in mountains and rivers and hills and glaciers. But my first job whilst at university was as a cashier in a high street branch of a UK building society. And incidentally, part of that role was to sell insurance products, like home insurance, pet insurance to our customers. So I feel that the insurance industry kind of got its hooks into me quite early on. But that was a really important role for me, a really important job. Back then, I was very shy, very introverted, and would struggle to have a conversation with our customers.

I find that very challenging. But, Stewart, look at me now on a podcast, no issues these days. And the role forced me into building my confidence and made me realize that I was actually pretty good with customers face-to-face and building relationships. And it made me realize, number one, that I really did want a career in finance. And number two, it was important to me that that career had to be client-facing. I had to have interaction with people. I didn't want to sit behind numbers on a spreadsheet all day. So after university, I went into banking and pursued a career in investment banking until an opportunity came up to move to Aberdeen and be able to bring the investment capabilities in the strategies from the banking world to an institutional client base.

Stewart: Yeah, it's interesting. Those who know me, they know that I'm really introverted too… I'm kidding. I can't stop meeting. I mean, I meet people everywhere I go. I talk to people, which I think I feel is really normal, but a lot of people do not. So I'm always meeting new folks. I really like that. I mean, certainly, you've come a long way from if you're shy at one point here you are on a podcast and you mentioned Aberdeen's deep roots in the insurance space. Some of our audience might not be familiar with that history. There was an evolution from the merger of Standard Life and Aberdeen Asset Management to today's, you mentioned $240 billion of insurance, a UM. What's that relationship today? What do you look like now as far as some of the asset classes that you cover? You touched on a moment ago, but just to give us a little bit of background there.

Shelley: So today within the private credit world, we are focused on delivering specialist private credit capability to our client base. And we're focused on managing third-party capital.

Stewart: Yeah, and I mean fund finance. And I'll be the first to admit, I am not a specialty credit savant. There are plenty of people on our executive council who are, but you have to kind of walk me, help me along with the training wheels here. But fund finance is a specialized corner of private credit and that terminology can be complex. Where does it fit in the broader credit markets? And what are the key distinctions between subscription lines, NAV-based lending, and hybrid securities? Just to name three.

Shelley: Got it. Well, look, you're not alone in asking for a bit more guidance and background to the asset class. When I speak to our clients about fund finance, I often say that this is the largest asset class that you've never heard of. So this is a $1.3 trillion asset class that does span a range of different loan structures, including subscription lines or capital call facilities through to the NAV loans and also GP finance. And it's incredibly well established that the banks have been doing this for three decades. But the landscape within fund finance right now is definitely shifting. There are many non-traditional lenders, including insurance firms that are looking to invest in these assets. So now's a good time to really get into the detail.

Stewart: One of the things about my particular seat is that I get a chance to talk to a lot of folks on both sides of the ball, right? So without a doubt, fund finance has gained traction with the insurance community. What makes it particularly attractive in the current environment? And I think you can give us a little bit of an idea around what the structure is. Is it fixed floating? What's the duration? Where do you guys play in particular?

Shelley: So, at Aberdeen, we focus on a type of fund finance called subscription line loans, or also known as capital call loans. And these are the credit facilities that are used by managers to bridge their investment activity or as working capital or as a form of liquidity. And it's where lenders will take credit risk against the underlying investor commitments in a fund. So that's typically against a large diversified pool of institutional investors, including insurance firms. So the credit risk is very well diversified, and that leads to high-quality, high investment grade ratings of these structures. They're a floating-rate asset class. They're typically short-duration with the legal maturity of two years or less. But in terms of what the attraction is for insurance companies, I would say the biggest attraction has to be the yield pickup, right? So, sublines are a great example of how that old trade-off between risk and reward didn't necessarily apply here. And this type of fund finance is a great way to maximize risk-adjusted income without moving along the credit curve and taking any excess credit risk. So as a quick reminder, these are investment grade quality assets, short duration, but they're delivering a yield pickup of between 80 and 150 basis points when compared to public credit assets with a similar rating and a similar maturity. And that's material, that's huge. And you get all this at the same time as credit and diversification.

Stewart: You use the phrase, and I want to make sure that that is short for subscription line, which is what you described at the outset of the question. Is that right?

Shelley: That's correct, Stewart. Yeah.

Stewart: Okay. I just heard it like the jargon and I just want to make sure, are we talking about the same thing? So that's super helpful, thank you. Given the nuances of this asset class, underwriting is critical. How does your approach differ between sublines or subscription lines and NAV-based lending, and what lessons has Aberdeen learned over your many years in this space?

Shelley: So Aberdeen, we have a reputation for being highly selective. We look to support best-in-class managers with a solid track record and strong governance. And that's consistent across both sublines and NAV loans. And also in terms of our underwriting, we're known for discipline and the depth of our due diligence. And again, that's consistent across both types of fund finance. So as an example, we have a great in-house transaction structuring and execution team of qualified lawyers who work closely with specialist external counsel on all of our transactions. And they spend a lot of time looking at fund documentation, including subscription agreements and side, to really try and identify and mitigate any risk points that could impact credit risk profile or the financial performance of the transactions. And in terms of lessons learned, I've learned many over the years of being a credit investor. Maybe one that's worth mentioning is that I found it's the loans that you don't make that are probably more important than the loans that you do make.

And I've certainly observed through multiple credit cycles that some lenders can sometimes be very reactive to market trends. They may start to relax their discipline in underwriting, they may loosen or remove covenants completely in order to remain relevant or to gain market share. But at Aberdeen, when we are managing client money, you have a different perspective and you absolutely must hold firm with your underwriting standards and you must maintain discipline. And I'm proud to look at the loan portfolio that we have constructed and it's very high-performing with no signs of stress or defaults or credit loss.

Stewart: That's fantastic. So I think that private credit and insurance asset management have something in common, which is it's all about relationships. Can you describe your sourcing ecosystem, if you will, how you originate deals, who the key players are, and why it matters that Aberdeen acts as a fiduciary agent as opposed to a distribution funnel?

Shelley: Yeah, this is so true, Stewart, and fund finances is no different. It really is very much a relationship-focused asset class. From my experience, GPs want to form long-term trusted partnerships with their lenders. And as a credit investor, you need to have that long-term relationship to develop a sound understanding of the investment strategy, their investment style, and the unique risks that are specific to that particular opportunity and loan. And look, furthermore, to be successful in this market, you really do need a broad network of relationships across GPs, banks, service providers, fund finance facilities can be very large, often several billion, syndicated across a group of lenders. So it takes a lot of collaboration across different pools of capital to make that work well for investors and the manager. So that said, Aberdeen, we have developed multiple origination channels. We originate loans directly from GPs and financial sponsors, but we also source loans from banks both at primary issuance and we also can buy seasoned loans from the banks as well.

We've intentionally sought to avoid overreliance on any single distribution origination channel, sorry. And that's a risk management strategy. We want to make sure that we have access to the very best deals in market at any one time, and we want to avoid any idiosyncratic risk that comes with sourcing from only one bank or only one manager. And that's really important to build the diversification into the loan portfolios. An important point to highlight is that because we are investing client capital, we source loans to order and in line with specific clients risk, appetites, and return requirements. We are not a platform that's been established to distribute risk that's been originated by us specific lender or a specific bank. It's really important to us, as I said, to be able to construct a portfolio around the very best opportunities that we see in the market.

Stewart: Lemme just ask you, I don't want to put words in your mouth, but just based on what you just said, that sounds like you can do fund finance with a custom set or a bespoke set of criteria. That seems to me that would be advantageous, particularly if someone was looking to gain exposure or avoid exposure to a particular industry. For example, if you had a liability book that had a significant concentration in an industry that you perhaps didn't want to have clash risk in the investment portfolio, is that possible with the technology and process that you have in place?

Shelley: Absolutely, Stewart, and that's what we have experience in delivering for our clients is constructing bespoke portfolios. So we can build loan portfolios around certain currency exposures. We can build portfolios to match requirements of different weighted average credit ratings, weighted average life of the loan book. We can avoid certain sectors. For example, if a client doesn't want exposure to private equity funds or it might not want exposure to credit funds due to their exposure to other strategies elsewhere within their portfolios. Fund finance is a global asset class. There are lots of different structures, lots of different types of managers that we support. And because of the scale and depth of our multiple origination channels, we do have access to lots of different deal types to enable us to do that.

Stewart: Well, it's interesting because as I know, sometimes CIOs have exposures that where the gap is a rather irregular-shaped puzzle piece and the ability to craft something that fits a particular exposure gap or being able to define what your exposures are is incredibly helpful. You know as well as I do that these CIOs have a really tough job. They're solving a fluid four-by-four Rubik's cube every day. It's great to be able to know that you have this capability. So I appreciate very much the fantastic education and fund finance. I've got a couple of other questions for you on the way out the door. If you're willing, and this kind of closing question is new to us, but I think it's particularly important when you add members to your team, what characteristics are you looking for? And I'm careful about how I'm defining characteristics. It's not what major did they have, what school did they go to, but what kind of characteristics that you're looking for when you're speaking with someone, you're trying to fill a role.

Shelley: When we hire into the investment team in fund finance, we're really looking for people with the ability to spot connections between different factors, who can spot trends and who can interpret these trends and connections. And we're also looking for people who are willing to challenge and who are willing to ask difficult questions and who are brave enough to present an alternative viewpoint. And I think that those skills and those attitudes and that way of thinking is really important in order to be a strong credit investor.

Stewart: That's very helpful and insightful. And my final question is this, you can have dinner with up to three people, alive or dead, one, two or three. Anybody alive or dead? Who do you most want to have dinner with, Shelly Morrison?

Shelley: Oh, look, I have two young children. So outside of work, my life is very busy transporting them from one activity and party and sports class to another. And sometimes it feels like I've not seen my husband in 10 years. So I'm going to say I would like to have dinner with my husband and it's his birthday tomorrow. So that feels like a good person to nominate. Just let's not tell him because his ego will explode.

Stewart: Okay, that's good. I appreciate that. That's nice. That's great. His birthday is tomorrow. Well, happy birthday. Happy birthday to your husband, and thanks for being on. I really appreciate your insights and for getting us up to speed on fund finance. So, thanks for being on, Shelley.

Shelley: Thanks very much for having me, Stewart. I've really enjoyed the conversation today.

Stewart: That's great. Thank you. So we've been joined today by Shelley Morrison, who's the Head of Fund Finance at Aberdeen Investments. Thanks for listening. If have ideas for past, Spotify, Amazon, or wherever you listen to your favorite shows. My name's Stewart Foley. We're the home of the world's smartest money at InsuranceAUM.com.odcasts, and by the way, we just got a great one yesterday. Stay tuned. Please shoot me a note at Stewart@insuranceaum.com. Please rate us, like us and review us on Apple Podc