The changing perceptions of public and private fixed income

Views from the TIAA General Account

The boundaries between public and private fixed income appear to be dissolving. How does this affect how the GA invests?

We’ve seen several examples of this in recent years. Deal sizes in the private middle market direct lending space have grown, creeping into the larger deal sizes of what’s traditionally considered the broadly syndicated loan space within public fixed income markets. In asset-backed finance, we’ve seen several deals issue two classes of securities – one for the 144a market (typically labelled a public security) and one for the 4a2 market (typically a private asset class market).

But this blurring of lines hasn’t had a significant impact on how the GA invests. Our approach will always be fundamentally liability driven. Regardless of public and private labels, we need to generate enough yield to meet the minimum rate guarantees in all environments, have sufficient liquidity to manage our liquidity needs, generate additional spread to remain competitive and maintain the financial strength that has become a hallmark of TIAA, all while operating within regulatory and risk limit framework requirements.

We work closely with our asset manager Nuveen to ensure we’re not focused on labels, but on the liability features we’re trying to satisfy in constructing our portfolio. This means a thorough understanding and evaluation of every investment going into the portfolio. Just because a security is tagged as public, it may not have the liquidity we need. Or if a security is tagged private, one can no longer assume it has full maintenance covenants.

The blurring of the lines also means allocators have to be careful in crafting investment guidelines for their asset manager ensuring full coverage of all opportunities. TIAA benefits from its relationship with Nuveen, which manages both our public and private fixed income mandates. Deals that straddle the two markets don’t fall through the cracks for us.

Institutional investors are re-engaging with public fixed income according to Nuveen’s latest EQuilibrium survey. How has the higher rate environment changed the GA’s expectations and use of public fixed income?

While we continue to find private fixed income an attractive asset class, given the covenant protections, additional yield and diversification benefits, the higher rate environment has toned down the fervent search for yield. And it’s allowed us to start allocating back into public fixed income securities given the attractive all-in yields they provide.

Also, in recent years, new risks and shifting market dynamics seem to appear with greater frequency – rising geopolitical risks, conflicts in Ukraine and in the Middle East, the tariff announcements and potential for a trade war. This frequency and the quickly evolving nature of these potentially volatile situations have necessitated more nimble and proactive repositioning of our portfolio holdings in order to control risk. This is much easier to do in our more liquid holdings, namely public fixed income, although some of the private fixed income holdings also can be liquid enough to allow for this repositioning.

The same survey highlighted the increasing use of private fixed income. Almost 95% of institutional investors hold private credit, up from 62% in 2021. How has the GA’s private fixed income exposure evolved over the last four years?

The combination of a low-rate environment, an extended bull market cycle and the growth in private market opportunities made private fixed income an area of emphasis for our allocations. Over the past several years, our investments were spread quite broadly across all areas of private fixed income – on the investment grade side, we continue to invest in private corporate bonds, private asset-backed securities, infrastructure debt and credit tenant loans. In private high yield (HY), which most in the market refer to as private credit, we have focused on middle market senior loans and mezzanine debt, done through Churchill Asset Management, a subsidiary of Nuveen.

Recently, one asset class we’ve been excited about is non-investment grade infrastructure debt. We believe it offers very attractive risk-adjusted returns in the current environment. We started investing in 2023 to take advantage of the growing addressable market opportunity in this space, driven by underlying trends in growing power demand, increased electrification and decarbonization trends.

With so much capital flowing into private markets, how does the GA ensure it has access to the best opportunities for its income goals?

It’s important to have the right asset manager who is aligned with our portfolio objectives. More specifically, one who understands the complexities of insurance company regulations, one who understands the liability-driven objectives of our portfolio and one who is aligned with our generally conservative approach to portfolio construction. We have this with Nuveen.

That solid foundation of mutual understanding is critical, but it also requires ongoing dialog and communication. We frequently share our market views, areas of concern and risks we’d like to avoid with Nuveen portfolio managers. In turn, Nuveen has been a true partner in helping shape our portfolio into one that we believe is resilient.

With regard to the flow of capital, anytime a lot of money flows into an asset class, investors should naturally be worried about a potential credit bubble. In the case of private HY credit, we’ve seen the asset class’s growing popularity sprout many new asset managers, who are eager to deploy the capital they’ve raised in their new funds. But for these new entrants to win against the more established players in sourcing deals, they either need to bid more aggressively (which means tighter spreads) and/or loosen covenant protections. Either way, it moves the market towards a potentially frothier environment.

While we’re monitoring the broader private HY credit market for a potential bubble, we have sized our holdings appropriately. Further, we remain confident in our private credit team at Nuveen because of their steadfast underwriting discipline and their continued focus on fully covenanted deals.