Ahead of speaking at PMP’s Inside the Deal conference, Corrado Pistarino, CIO of Foresters Friendly Society, discusses how he has built exposures in increasingly niche areas of private markets
Foresters Friendly Society is the owner of a UK mutual insurance company with an aggregate balance sheet of £300 million, including assets owned by a benevolent fund. The insurer has been traditionally active in accumulation (with profits) products and does not provide annuities, so it does not operate within a matching adjustment framework.
Corrado Pistarino joined Foresters as chief investment officer (CIO) in late 2017, dividing his time between Foresters and roles at other financial institutions. He has overhauled the insurer’s portfolio, transitioning from a traditional asset allocation strategy to one that encompasses a broader investment universe including private assets. For the benevolent fund, similarly, he added complex, illiquid assets, sampling from real estate, infrastructure, mid-market lending, trade finance and venture debt.
How have you impacted the investment strategy?
Pistarino: There have been two major objectives to our new strategy. One was to strengthen the strategic asset allocation by broadening the universe – from UK gilts, Sterling credit, domestic equities and a property portfolio – to become much more diversified both in terms of asset classes and geographic reach. We also partnered with AXA Investment Managers, as part of a process to strengthen our investment governance and operational setup.
Sterling credit remains essential – it’s a core asset class on our balance sheet. But we played around with duration, with a major tilt towards short-term over long-term credit, and introduced both high yields and convertibles for further diversification. In terms of geographic reach, we moved from domestic to pan-European, North American or global investment propositions wherever possible and profitable.
The second part of our strategy centred on accessing private markets – and this was even more important. We have arguably been a bit of a trailblazer, especially if you consider the size of Foresters.
Are Foresters’ objectives particularly well matched to private markets? Or could any similarly sized institution take the same approach?
Pistarino: We are not special – any organisation could build private markets exposure. But they would need to have a strong and experienced investment function, to provide comfort to the investment committee, the board and all other relevant functions that the risk profiles of unfamiliar investment opportunities are well understood. This is done by conducting thorough due diligence across all relevant risk dimensions of proposed investments.
It is not common for mutuals the size of Foresters to have a dedicated CIO. CFOs typically handle the investment strategy, but they may not be investment specialists. This can result in heavily tilting towards traditional asset classes and a domestic bias, a replica of what their peers have been doing for decades. We try to be more inquisitive and responsive to market innovation.
How did you go about building up exposures in private markets?
Pistarino: We started by exploring the mid-market lending space. Insurance companies are mostly credit investors and private lending is a natural extension of corporate credit.
As we progressed on our journey to create a well-diversified portfolio of private assets, we have increasingly tried to identify untapped sources of complexity and illiquidity premia. For instance, some asset classes have a structural imbalance between supply and demand that offer interesting opportunities.
It requires extra effort to identify, assess and quantify the portfolio impact of niche propositions, but limited access usually means a hefty risk premium can be harvested. We want to be at the forefront of innovation in portfolio construction and invest before other investors go in – that’s always been our guiding principle.
It’s important to highlight that this is a journey. The process may strain some of the established boundaries within an organisation and it is paramount to be able to carry the whole organisation with you. It is important to provide comfort that we are absolutely operating within a prudent framework that is consistent with our risk appetite.
We want to be at the forefront of innovation in portfolio construction and invest before other investors go in – that’s always been our guiding principle
Corrado Pistarino, Foresters Friendly Society
Trade finance may be seen as a relatively unconventional option for a small insurer. How did that pan out?
Pistarino: Trade finance was considered quite advanced by our peers when we invested, but we saw an opportunity. After the significant disruption of supply chains due to the emergence of Covid-19, things looked rosier towards the end of 2020. We believed that global trade would resume in a hefty way and so we asked ourselves, ‘Is there a way to capture some of the economic benefits of this reopening?’ We thought investing in trade-related assets was a good idea.
We particularly liked the risk profile of this asset class, combining the self-liquidating characteristic of underlying claims with a long history of stable spreads over liquid asset returns. It’s floating rate, or highly sensitive to short-term rates, so there’s no material duration risk. The managers usually provide monthly or quarterly liquidity, so it’s an important component to our liquidity management strategy. It’s been one of the best investments we have made.
We examined several strategies and went for two with competing characteristics. The first fund offers a very granular portfolio, similar to a securitisation portfolio. It builds on traditional factoring techniques, something that commercial banks have been doing since time immemorial, and applies a technological edge to deliver steady returns.
The other strategy is a commodity-backed fund, with a far less granular portfolio more akin to a direct lending managed account. Name-by-name due diligence is applied and the claims are backed by the commodities, either shipped or stored. If an obligor defaults, the fund can improve the recovery rate by crystallising the fixed charge over the underlying assets.
What advantages does trade finance offer?
Pistarino: The underlying claims liquidate over a short period of time, 60 days on average for our funds, and funds tend to be quite uncorrelated with market movements. Any borrower can default, of course, so it carries some credit risk. But unless there is a systemic event, you will get your money back. Idiosyncratic defaults are unlikely to eat into returns significantly.
Quarterly liquidity is delivered with a high degree of certainty. It’s a very different to a typical repayment commitment. For example, a property fund may offer quarterly liquidity but that is predicated on new money coming in or the manager being able to sell properties. Both become very difficult when investors lose faith in the asset class.
Have you gained exposure to riskier options such as growth debt?
Pistarino: One of our most recent investments has been to provide seed money to a UK growth debt fund, in partnership with the British Business Bank and Phoenix. We believe growth debt still represents an untapped source of risk premium. Furthermore, as a UK insurer, we are very pleased to be helping UK businesses develop out of infancy.
The fund is tech-focused, lending to enterprises rich in intellectual property. The expected returns are attractive, due to it sitting at the riskier end of the risk spectrum – companies are at an early developmental stage and sometimes things may go wrong. We prudently keep our exposure to riskier asset classes relatively low.
Is there a long-term opportunity in UK growth debt, even if rates go back down?
Pistarino: While interest rates have an impact, early-stage projects should not be excessively sensitive to them. For firms in their infancy, leverage and gearing are low anyway. If a firm operates in a growth area, its business case should be strong enough to withstand some rates volatility.
I hope growth debt morphs into a structural allocation in institutional portfolios, as both Europe and the UK absolutely need to increase the pace of innovation. Artificial intelligence will have ramifications for the entire economy and we are committed to helping innovative enterprises develop into established businesses.
Corrado Pistarino will be speaking at Private Markets Profile Live: Inside the Deal on 27 February at Saddlers’ Hall in London