Privately Placed Debt on Life Insurers’ Balance Sheets: Part 2—Increasing Complexity

In this second part of our Chicago Fed Letter series on life insurers’ investments in private placements, we use novel data to assess the growing complexity and liquidity of these investments.1 We start by documenting that these investments have shifted toward issuers in financial and real estate sectors. We then show that this shift reflects more lending to asset managers, including private direct lending funds. One reason for this shift to financial issuers is that these private placements tend to be more complex and less liquid, resulting in higher yields. Lastly, we show that, while private placements can be sold in the secondary market, liquidity in this secondary market is significantly lower than in the secondary market for publicly traded corporate bonds. The growing investment in this less liquid asset class therefore increases the risk of fire sales during times of crisis. This article sheds light on the changing nature of this growing asset class on life insurers’ balance sheets and outlines some potential ramifications for financial stability.