Private Market Portfolio Construction: What Insurers Need to Know

In brief 📝

Toby True, partner on the Investment Strategy and Risk Management Team at Adams Street Partners, shares insights on building effective private market portfolios for insurers in a podcast with Stewart Foley of InsuranceAUM.

Why it matters: Insurance companies own 30% of the world's invested assets ($35 trillion), yet navigating private markets requires specialized expertise due to their illiquidity and complexity.

Big Picture Drivers 🔍

• Scale matters: Adams Street Partners manages $62 billion in private markets, with $10 billion specifically for insurance companies

• Illiquidity challenge: Private markets require longer time horizons and accepting more unpredictable return patterns and timing

• Data evolution: The industry is rapidly gaining access to better, faster data across market cycles

• Opportunity window: Current market conditions create strategic entry points despite slower distribution cycles

The foundation of effective portfolio construction 🏗️

According to True, portfolio construction boils down to "aligning investor interests with the characteristics of underlying investments." Success depends on mastering three critical elements:

1. Finding the optimal number of investments:

   • Too few investments creates dangerous concentration risk and outcome variability

   • Too many investments creates administrative burden and dilutes best ideas

   • Data analysis helps identify the right balance for each portfolio type

2. Creating the right allocation mix:

   • Strategically balancing primary investments, secondaries, and co-investments

   • Diversifying across venture capital, growth equity, and buyout investments

   • Carefully distributing across geographies and sectors based on risk tolerance

   • Insurance portfolios require more precise targeting than general portfolios

3. Strategic capital deployment timing:

   • Typically deploying capital over 3-4 years avoids concentrated market timing risk

   • Phased approach allows course correction based on early performance

   • Historical data helps test different scenarios for better risk management

   • Insurance clients require more specific risk/return profiles than other investors

Memorable quotes 💬

• "Portfolio construction is the alignment of the investor's interests with the characteristics of the underlying investments."

• "Despite liquidity being slower... if you look under the hood, most of the companies are fundamentally very healthy. They're profitable. They're growing."

• "The best time to be an originator of consumer credit is after the market is repriced, after there's been a blow up."

• "Private credit returns have been good. But the challenge for investors is how to make sure they're underwriting to something where they may have to invest through a different part of the market cycle than what they've seen in the past."

What's different for insurers ⚠️

Insurance portfolios require more specific risk/return profiles because private investments fulfill particular roles within their overall portfolio strategy. Adams Street uses historical data to develop different scenarios and test portfolios against extreme market conditions—not just median cases.

The current market paradox 🔄

• Surprising trend: Slower liquidity but healthy company fundamentals since 2022

• Under the hood: Companies are following investment plans, remaining profitable and growing

• Analytics insight: Looking at growth rates, EBITDA, revenue trends, and leverage ratios shows fundamental health despite distribution delays

• Looking ahead: Expect the liquidity cycle to eventually swing back, as it has in previous cycles

Top concerns to monitor 👀

1. Secondary market discipline: Competing pressures between buyers needing to deploy capital and sellers seeking liquidity can distort pricing

2. Private credit maturity: The industry hasn't experienced a full credit cycle since becoming mature—differentiating risk levels is challenging during good performance periods

Bottom line 💡

While private markets offer attractive returns for insurers, effective portfolio construction requires balancing illiquidity risk with strategic diversification and careful timing. The current environment of healthy fundamentals paired with slower liquidity requires both patience and discipline.