By Hamlin Lovell, NordicInvestor

Within the global Aegon Group, Aegon Asset Management is a specialist asset manager managing  c. EUR 305 billion, of which roughly one quarter is captive money for its own entities, and three quarters is external or third party money. Aegon’s main focus is on institutional clients, such as pension funds, insurance companies, family offices and banks (though some products may be distributed to retail investors via platforms).

Most assets have been raised in Europe (in the US, capital from Insurance-brand “Transamerica” is internal). The firm has expertise in fixed income, real assets, multi-asset and solutions, which can blend a wide variety of traditional and alternative asset classes, including insurance linked securities, litigation finance, and renewables.

NordicInvestor interviewed Frank Drukker (pictured above, second from right) and Peter Slob (pictured above, second from left), who are based at Aegon HQ in The Hague, and cover three Nordic countries – Sweden, Denmark and Finland –on a “fly in, fly out” basis, regularly visiting Stockholm, Copenhagen and Helsinki.

Being part of an insurance giant distinguishes the strategies. “Aegon coinvests in all strategies itself, and therefore has a keen interest in optimizing Solvency 2 risk budget usage, transparency and reporting,” says Drukker. Some strategies use other parts of the firm: “There can sometimes be synergies with the insurance side of Aegon, like co-investing alongside of 3rd party clients, or using the expertise of the insurance colleagues e.g. on the policies for credit insurance. To prevent however conflicts of interest, Aegon would never give a policy to a credit, Aegon AM is managing.  says Drukker. Similarly, Aegon’s fiduciary management offering draws on Aegon’s own experience of asset-liability management and liability driven investing, to offer an outsourced CIO (OCIO) service that Aegon calls “delegated CIO”.

Former TKPI fiduciary management in Groningen is also part of the group, while Kames in the UK and recently fund finance specialist ASR are others, but all of these brands were retired after Aegon Asset Management decided on one global brand (separately, global distribution partners include La Banque Postale in France, China Industrial Fund Management Company for A shares in China, and a joint venture with Monreal in Brazil).

Alternative fixed income

Fixed income assets of EUR 163 billion include traditional assets of investment grade credit, sovereigns, and emerging market debt (which Aegon calls “core” fixed income); leveraged finance and alternative fixed income.

The alternative fixed income platform spans residential mortgages; asset backed securities including export credit agency loans, fund finance; private debt and credit through direct lending and private placements; impact ESG private debt, structured finance, insured credit as well as EU SME and Midcap lending. It is led by Frank Meijer (who NordicInvestor has interviewed) and manages around EUR 80 billion. “Strategies range from super liquid ABS in daily dealing funds to whole loans that are very illiquid,” says Drukker.

(Aegon’s real assets includes some real assets debt strategies that could also be classified as “alternative fixed income”: commercial and agricultural mortgage loans and tax credit equity including US Low income housing tax credits (LIHTC)).

Alternative fixed income aims to offer yield pickup and risk diversification.

Yield Pickups

The credit rating profile ranges from AAA for many Dutch mortgages, social housing loans or other European ABS; to AA for global insured infrastructure and credit, European ABS, and capital call finance; BBB for renewable infrastructure, private placements, and global NAV finance, and down to BB or B for Dutch SME loans.

At the AAA level, pickup can be 80-150 basis points over swaps, depending on sub-asset class and structure. Dropping just one notch to AA+ can add an extra 20-30 basis points taking the total up to 100-180.

AA or A rated paper such as Export Credit Agency (ECA) insured infrastructure debt could pay 175-275 over, while renewable infrastructure debt may pay slightly less.

Meanwhile BB, or BBB rated ABS, including NAV finance (still in the IG-space), can pay 400-650.

Credit ratings are only one factor. Within ABS, specialty finance, such as student loans, car loans, credit cards or CLOs, can offer an additional premium over residential mortgages.

Aegon prefers single sub-asset class strategies to blends, and one strategy that combined consumer loans with SME loans sourced from FinTech platforms was unbundled: both strategies are offered separately.

Can the largest funds stay liquid?

Aegon runs the largest global investment grade ABS fund, according to Morningstar data in January 2024: the Aegon European ABS fund at c.€5.5bn AuM, based on searching for funds with ABS in the name and excluding non-investment grade.

The daily liquidity feature was tested in October 2022, when the UK had a mini-bond crisis that forced pension funds to raise cash for margin calls. “We were able to provide the liquidity while some competitors could not. We facilitated all redemptions and almost all clients later reinvested,” says Drukker. “The underlying Dutch mortgages did not see contagion from the UK market, their spreads of 150-250 over swaps were stable,” he adds.

(During this turbulent period the anti-dilution levy bid/offer spread on the fund was widened out somewhat, to protect remaining investors from transaction costs of selling assets to meet the redemptions).

Introducing Fund Finance

Aegon’s merger with ASR Insurance has brought with it ASR’s specialist asset manager, which some parts has been merged with Aegon Asset Management. This adds expertise in fund finance for private equity funds. The two main strategies are lending against capital calls, with recourse to limited partner investors such as large pension funds, and NAV financing, with recourse to the underlying assets of private equity funds.

For capital call facilities (AA/A credit rating) the spread was stable at 150-175 to above 3 month Euribor between 2018 and 2023 but has recently widened out to 200-250 basis points, since some large US regional banks and large investment banks have withdrawn from the space. In contrast, on the NAV financing side (A/BBB credit rating), spreads have slightly compressed to Euribor + 400 – 500 basis points, observes Peter Slob, who adds the caveat that this data is based on a small number of transactions.

There have never been any defaults, and Slob thinks they are very unlikely : “Given the fact that we are working only with well recognized and properly established PE houses/GPs (e.g. APAX), given the low LTVs (say up to max 20%) and strong covenants, the GP will never jeopardize its franchise for these type of loans. We did not face a default (or credit event) yet, but they will always use their cash to payback such a loan (and not risking their multi-billion PE operation)”.

Over the years, NordicInvestor has published more detailed interviews on several alternative fixed income strategies run by Aegon Asset Management, and we expect to investigate others, including fund finance, with some in-depth interviews later this year.

ESG

“ESG is in our veins and over 21 dedicated specialists support the PMs and carry out hundreds of engagements each year,” says Drukker. Active ownership highlights financially material ESG risks.

Over EUR 135 billion of assets across the firm integrate ESG in various ways, including exclusions and ethical; best in class ESG; climate transition, sustainable and impact investing.

Alternative Fixed Income can in some cases offer potential for special types of positive ESG impact, including social housing loans, Export Credit Agency guaranteed loans, insured infrastructure and credit, and renewable infrastructure.

Though these strategies provide clear evidence of positive impact, Aegon has chosen to focus more on the intrinsic value add of the ESG-integration than going for a certain qualification under SFDR. The qualification of a capability being qualified as a SFDR art 8 or 9 capability is a consequence of that and not a goal as such.  “We surely have art 9 strategies as Aegon’s partners, LBP AM in France, does run an Article 9 strategy in infrastructure debt, with its own dedicated impact-reporting” says Drukker.