Daiichi Life Group is tightening the process for selecting managers of private credit investments to decrease risk after several high-profile defaults overseas.
Japan¡¯s second-biggest life insurer by assets will more strictly assess managers¡¯ performance, how stable their assets under management have been and if there has been investment sector bias, according to Masashi Kataoka, head of the alternative investment unit at the Tokyo-based firm.
¡°Now¡¯s the time to scrutinize managers,¡± Kataoka said in an interview. ¡°There are big differences in the skill levels of alternative investment managers, and we¡¯re seeing that now.¡±
Several bankruptcies of corporate borrowers in the United States have fueled investor concern about the safety of putting cash in the market, and those worries are starting to affect Japanese firms¡¯ investment decisions. They¡¯ve seen how investors were unable to redeem billions of dollars of capital in private credit as U.S. firms limited withdrawals.
The Financial Services Agency said that the nation¡¯s financial firms have ¡°limited¡± exposure to private credit in the United States, and their risk management has become more sophisticated, but the regulator will continue to review risk-taking policies.
The market¡¯s more cautious tone comes as Japanese financial companies rush to catch up with peers in the U.S. and Europe, to diversify their portfolios with private credit as an alternative to stocks and bonds.
Daiichi Life is also considering establishing a system that utilizes data analysis by external firms to manage the balance of its asset portfolios and monitor early signs of risk, Kataoka said.
The insurer is reducing its share holdings to decrease risk as part of the industry¡¯s efforts to improve financial health. That means that some of its dividend income from equities will be gone, and companies are trying to offset that loss by generating investment returns from private credit.
Kataoka has spent about 20 years of his three-decade career in alternative investment-related positions including several years in New York. He knows well the risks from holding such assets such as lack of liquidity and the tendency of individual investors to dump investments when the market is weak.
Strict selection of managers and risk management after making private credit investments are key, and if those steps are carried out, ¡°it¡¯s an attractive asset class in the long term,¡± he said.
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