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Corporate pensions are better funded and more fixed income–oriented than ever, and with LDI now widespread, fixed income composition has become increasingly consequential.
Apollo Partner Brian Weinstein explores how tight spreads and crowded returns have pushed sponsors beyond public IG into diversifying credit anchored by private placements and real estate financing. Private IG extends this further, tapping higher-quality privately originated assets to improve diversification, income and surplus outcomes while preserving hedge efficacy.
In recent years, corporate defined benefit plans have seen meaningful improvement in funded status, driven by a favorable combination of higher discount rates, strong asset returns and the cumulative effects of long-term de-risking (Exhibit 1).
As sponsors have progressed along their glidepaths, fixed income has evolved from a supporting allocation into the dominant component of the portfolio (Exhibit 2).
Exhibit 1: Funding Status for Corporate DB System Approaching Post-GFC Highs
Exhibit 2: Corporate DB Asset Allocations Have Become More Bond-Heavy by Design
As public credit spreads have compressed toward historical tights, many plans have de-risked into fixed income just as public markets offer less compensation per unit of risk. In response, a growing number of sponsors have adopted “diversifying credit” or “LDI Plus” allocations — typically anchored by traditional 4(a)(2) private placements and real estate financing — to introduce differentiated sources of spread alongside their public credit holdings.1
These allocations reflect a widely held recognition that the hedging portfolio can be made more productive without sacrificing credit quality.
Private Investment Grade can be understood as a natural extension of this same impulse. It can help preserve the liability-aware characteristics that make these sleeves attractive, while accessing a broader set of privately originated, high-quality assets, spanning private corporate credit, asset-backed structures and warehouse financing, that extend well beyond the public credit markets. For plans that already hold diversifying credit, Private IG can represent the next evolution of an approach they have already adopted.
What distinguishes Private IG from public investment grade credit is the way the investments are sourced and structured. Through bespoke financing and asset-backed transactions, Private IG can access less-intermediated parts of the credit market that do not appear in standard public bond indices. These strategies target mid- to high-single-digit yields, which have historically exceeded comparable public credit by roughly 150 to 300 basis points, driven primarily by liquidity, structuring and origination premia, rather than by moving down in credit quality (Exhibit 3).
Exhibit 3: Private IG Corporate Has Historically Generated 150-300bps of Excess Spread to Public Comparable
In contrast to typical “diversifying credit” allocations, Private IG spans a broad universe of origination, as opposed to one specific asset class or sourcing channel. As a result, Private IG strategies can direct capital to attractive risk-adjusted opportunities through ongoing assessments of cross-asset relative value. Freed from tracking a fixed benchmark, allocations can shift toward structures offering optimal spread per unit of risk at a given point in the cycle. The result is a portfolio shaped by deliberate selection rather than by the composition of an index.
Historically, liability-hedging allocations have involved a sharp tradeoff between hedge effectiveness and expected return. In the public credit market, long-duration, highquality assets have naturally provided strong hedge characteristics but are often quite limited in excess spread, while higher-yielding allocations tend to weaken alignment with plan liabilities as the additional carry is typically compensation for lower credit quality (Exhibit 4).
Exhibit 4: Private IG Preserves Hedge Efficacy, while Contributing Excess Spread
Private IG can help address that tension. With an investment-grade profile, an average A/A- credit rating and duration aligned with commonly used benchmarks, Private IG is intended to behave as a liability-aware asset rather than solely a return-seeking substitute. The result is a high correlation with the AA Corporate universe used for liability valuation, while seeking to provide spread-premia relative to comparable public credit and private placement strategies.
Further, as public credit indices have become increasingly concentrated in a narrower set of issuers and sectors, large portions of hedging portfolios can be exposed to the same spread factors, market technicals and crowded sources of active return (Exhibit 5).
Exhibit 5: Private IG Diversifies Away from Public-IG Sector Concentrations Into Differentiated Sources of Spread
While existing diversifying credit allocations partially address this issue, they too tend to concentrate within specific issuer-types often found in the public credit market.
Private IG’s defining strength is its breadth: by spanning privately originated corporate credit, asset-backed finance and warehouse financing — sectors that are largely inaccessible in public markets or through other forms of diversifying credit — Private IG can introduce differentiated sources of spread that reduce commonfactor dependence while preserving the portfolio’s liability-aware characteristics.
Taken together, Private IG’s hedge efficacy, excess spread and diversification make it a potentially attractive option to help improve the productivity of the hedging allocation. Used alongside existing fixed income, it can help pull the surplus frontier forward, improving the balance of return and risk for plan assets relative to liabilities (Exhibit 6).
Exhibit 6: Private IG May be Used to Improve the Efficiency of the Surplus-Frontier
How Private IG is used, and in what size, depends on a plan’s funded status and where it sits along its glidepath. As plans approach full funding, the focus shifts from closing the funding gap to preserving surplus, and Private IG’s role shifts with it, from complementing return-seeking assets like equities and sub-IG credit to sharpening the efficiency of the hedging portfolio.
In practice, this principle plays out across three plan archetypes: underfunded, fully funded, and overfunded. For each, the case for Private IG, the capital it most naturally replaces and the outcomes it supports shift with the plan’s objectives.
Corporate pensions are better funded and more heavily weighted to fixed income than at any point in recent history, and with LDI now standard practice, the composition of that fixed income matters more than ever. Public investment grade credit remains the anchor of the hedging portfolio, but tight spreads, concentrated benchmarks and crowded sources of return have pushed many sponsors beyond the public market, adopting “diversifying credit” sleeves anchored by traditional private placements and real estate financing.
Private Investment Grade can represent the next step in that evolution. By tapping a broader set of privately originated assets — corporate credit, asset-backed finance, and warehouse financing — Private IG may improve diversification, strengthen income and enhance surplus outcomes, all while aiming to preserve the hedge efficacy an assetliability framework depends on.
Footnotes:
Source: Apollo Analysts
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