Diversifying LDI Income with Core DebtDiversifyingLDIIncomewithCoreDebt

Overview

A large financial services asset manager was seeking to augment the hedging strategies used in its liability-driven investments (LDI) to provide solutions to its pension clients.

Key Partners

• Large financial services asset manager
• PGIM Real Estate sales and client service team
• PGIM Real Estate investment management team

Challenge

The asset manager was searching for sources of non-traditional, diversified private fixed income to complement existing long-duration corporate credit and government bonds in its liability hedging portfolio without adding incremental credit risk.  

Approach

PGIM Real Estate’s long history of investing private fixed income assets offered the asset manager detailed credit analysis that predated the benign credit environment that has existed post-GFC. As such, the asset manager could evaluate the credit risk, volatility and correlation of the private credit strategy relative to public hedging instruments. In addition, as an open-end fund, the strategy provided the flexibility for the asset manager to easily access the private asset class as it received underlying inflows from its clients and to rebalance its allocations over time. 

Solution

The asset manager’s investment thesis was that private fixed income would provide investors with excess return potential and diversification relative to traditional LDI hedging portfolios. PGIM Real Estate worked closely with the asset manager to identify solutions that would help it to structure its portfolio to achieve investment returns. Ultimately, the asset manager selected PGIM Real Estate’s core commercial mortgage loan fund, which gave it access to our large, direct origination network and in-house servicing team. 

• Partnered with the asset manager to identify appropriate solutions to build its portfolio
• Worked closely with the asset manager to help it understand the asset class, including expected performance, sources of diversification and nature of the underlying collateral
• Educated the asset manager on PGIM Real Estate’s investment and valuation processes, as well as deployment and liquidity expectations
• Adapted fund standard reporting to incorporate specific needs of the client
• Throughout, provided a high level of client service and information sharing

 

Case studies are provided for illustrative purposes only and results may vary.