Markets

Americans’ Nest Eggs Built a Private Equity Loan Revolution

 Private equity managers are desperate for cash. Insurers are lending it out for higher returns, and exposing themselves to potentially hard-to-sell assets

By Laura Benitez and Scott Carpenter

Illustrations by Félix Decombat

Ordinary Americans are helping throw lifelines to private equity funds.

The insurance and annuity arms of Wall Street powerhouses including Apollo Global Management Inc., Ares Management Corp. and the Carlyle Group Inc. rank among the most active providers of an esoteric type of financing once dominated by banks and specialist lenders, according to market veterans handling the private deals.

Apollo’s Athene insurance unit alone has pumped roughly $18 billion this year into funding the debts known as NAV loans, in which fund managers post their investments — or net asset value — as collateral.

Buyout funds can use the money to shore up portfolio companies, redeploy it into new deals or seed new funds. Some loans enable payouts to investors who’ve been waiting for years to recoup stakes in hard-to-sell assets.

A relatively obscure niche before the pandemic, NAV lending has been gaining momentum the past few years and is now snowballing. The roughly $225 billion of NAV loans outstanding will probably double in the next two years and surge as much as sixfold by 2030, according to Kevin Alexander, co-head of alternative credit at Ares. That would exceed predictions by other industry insiders from just a year ago.

NAV loans serve as a window into the rapid evolution of private markets giants. Their insurance divisions — units that now drive much of their growth — are reaping juicy yields from making loans to buyout funds that once laid the industry’s foundations but now struggle to generate cash from sales of companies.

Some see the loans as a way for those insurers to combine their companies’ knowledge of corporate buyouts with long investment horizons to pick up higher interest rates than they’d get in public bond markets. For others, it’s a sign of how far life insurers have moved beyond old comfort zones. Once focused on the safety of public bonds and blue-chip stocks, insurers are wading deeper into private credit, private equity and other complex or hard-to-sell assets.

High rates and high demand have drawn a variety of players. Specialist firms were once the best known NAV lenders, but big Wall Street firms like Goldman Sachs Group Inc., Blackstone Inc. and Pacific Investment Management Co. are increasingly active. Often investing on behalf of insurance clients, they buy various types of NAV loans.

Carlyle’s Alpinvest has extended billions of dollars of loans this year to private equity firms — some of which are deals that have been rated investment-grade and placed within its insurance businesses.

What sets the fleet of insurers apart from many other NAV funders is the source of their money.

Firms offering life insurance and annuities effectively shepherd the nest eggs of millions of Americans. A series by Bloomberg this week examines how Wall Street firms have taken over part of that industry, shifting more liabilities offshore and expanding into more complex asset classes — even if some retirees don’t want their money there.

“Our focus is top-of-the-market, investment grade loans with low LTVs and highly diversified positions,” a spokesperson for Apollo said in a statement, referring to loan-to-value ratios in which the collateral is worth much more than the debt. “Our loans performed well when this market was tested in 2023 and 2024, with no downgrades, impairments or losses.”

A Carlyle spokesperson said that as the asset class has matured, “we’ve seen better-quality managers with high-quality assets, low LTV, and increased diversification accessing the market.”

Ares said banks generally prefer to make loans and then sell them, which doesn’t work when borrowers need customized terms. That leaves it an advantage: “Large scale flexible capital has allowed us to drive terms and be selective with what we do.”

A spokesperson for Blackstone said it takes “a selective approach to the fund-finance market, prioritizing investment-grade credit assets for our insurance clients and avoiding areas with elevated risk.”

Representatives for Goldman and Pimco declined to comment.

Proponents of NAV lending emphasize that borrowers typically post collateral worth several times the value of the loans, and that the assets are diverse, lowering the risk their value might drop en masse. Even the worst-performing private equity funds barely ever lose more than 10%. Those features help NAV loans win investment-grade credit ratings.

Many of the loans are graded A-, or four steps above junk, according to Kroll Bond Rating Agency, which dominates the business. The instruments typically yield about 3 to 4 percentage points more than similarly rated corporate bonds trading publicly, according to market veterans.

But if NAV loans do falter, they may expose buyers to some of the stickiest wagers collected by buyout funds over the past decade.

Across the country, many firms are struggling to get attractive prices for the investments they acquired when financing was cheap and easy in the era of near-zero interest rates.

Some private equity managers are letting clients exit by selling assets to so-called continuation funds or to outside secondary funds. Both of those groups have become NAV borrowers. KBRA estimates that about half of the NAV loans it rates go to “seasoned private equity funds.”

It’s hard to predict how the relatively young business of NAV lending would deal with widespread trouble. Debts struggling now are being restructured quietly, according to people involved in the talks, who like others for this story asked not to be identified describing private dealings.

“We’re cautious that continuation vehicles could be masking stress,” said Matt Albrecht, chief analytic officer for financial services at ratings firm S&P. “We have seen a few defaults but nothing that really tests this market.”

Several Wall Street leaders have started to openly predict that some weakened private equity firms won’t survive the current slump. That may test those managers’ ability to sell holdings at attractive prices to repay debts.

“There’s growing concern about the valuations still sitting on the books,” said Darius Craton, a director of Raymond James Financial Inc.’s private capital advisory group. “There may need to be some rebalancing or revaluations ahead — a kind of reckoning within portfolios that isn’t yet fully clear.”

The mass migration of insurers into more esoteric investments started after the 2008 financial crisis, when alternative asset managers acquired or built life insurance arms, ramped up sales of annuities and began shifting a portion of the cash from policyholders into higher-octane investments.

NAV loans are now among the faster-growing avenues for insurers to help provide financing to private equity managers.

Other complex structures include collateralized fund obligations — whose creators typically bundle stakes in seasoned private equity and credit funds into a single vehicle, slice it into tranches of varying risk, and sell the pieces to insurers and other investors.

“We’re cautious that continuation vehicles could be masking stress”

The products are attractive to insurers because they require less capital to hold than directly investing in a private equity fund.

Private equity’s demand for NAV financing grew in the wake of the pandemic, as interest rate hikes made it tougher for managers to find buyers of their holdings. Small and mid-size funds needed to find ways to turn aging portfolios into short-term cash.

People close to some insurers said they focus on NAV loans to the biggest names in private equity, or to smaller funds with diversified pools of assets.

Insurers tend to be more amenable to complex investments if their corporate parents also own alternative investment managers, according to a study published last month by the Bank for International Settlements. Such firms typically place more than a quarter of their total portfolios into structured products, which may include some NAV loans. In contrast, independent insurers typically allocate less than half that to such instruments.

Even if the NAV loans they buy aren’t going to their parent companies’ private equity funds, dealings between divisions aren’t taboo. Disclosures by insurers controlled by Wall Street firms show they typically plow about 14% of their portfolios into affiliated private equity funds or products, the BIS report found.

Pricing has improved for borrowers, a recent industry survey shows. And terms have gotten sweeter, too, according to people with direct knowledge of the deals.

More lenders are letting borrowers defer interest payments until it’s time to repay principal, a practice known as payment-in-kind. Those schedules can raise borrowing costs, with PIK rates reaching the low teens, said Leonardo Targia, an investor at IDC Arena Credit Ventures, who previously helped advise institutions on alternative investments.

That prospect has attracted the attention of the International Monetary Fund, which has been digging into concerns this year that money managers are using NAV loans to mask strains.

KBRA has graded more than 250 deals awaiting insurance capital — including NAV deals, it said.

Solid credit grades let insurers pile up the debts without a steep capital charge.

Some banks, meanwhile, have pulled back — finding that their industry’s capital rules make NAV loans too punitive, said Richard Sehayek, co-head of European alternative credit at Ares.

Together, the incentives for insurers have made NAV loans one of the fastest-growing parts of the broader fund-finance industry, which Ares’s Alexander predicts will grow to $2.5 trillion in the next few years.

Apollo’s Athene, along with Goldman, helped Vista Equity Partners return cash to clients by backing $1.5 billion of NAV financing against a portfolio of private equity assets in 2023. The initial all-in rate on the loan was 9.37%, which gives the borrower the option to defer interest. Roughly $500 million of the financing, which was set to mature in early 2028, was used to finance distributions, according to people familiar with the matter.

This year, Apollo increased a landmark loan it made to SoftBank Group Corp.’s Vision Fund 2 by $900 million to a total of $5.4 billion, a record for NAV financing. The investment was placed in Apollo’s insurance operations, a person familiar with the matter said at the time.

Blackstone and Carlyle have also extended billions of NAV dollars of loans this year — deals that have been rated investment-grade and placed in their insurance businesses, according to people with knowledge of the transactions.

The financing spree has drawn mixed responses from private equity investors, known as limited partners or LPs.

Some are urging fund managers to borrow money and distribute cash.

Others are skeptical — pressing fund managers to disclose NAV financing and seeking protections. LPs have added thousands of provisions referencing NAV loans in confidential side letters with private equity funds, said Troy Pospisil, chief executive officer at Ontra, an artificial intelligence software provider to the industry.

“We’ve seen the trend accelerate over the past year,” he said. “LPs are becoming increasingly sophisticated when it comes to their expectations.”