Rated-Note Feeder Funds: All You Need to Know

In an interview with PDI, Greg Myers, Global Sector Head, Debt Capital Markets at Alter Domus, and Jason Kolmon, Partner at Ropes & Gray, discuss how the innovative rated-note feeder fund structure can help insurance companies access opportunities in private credit markets. 

The rigid regulatory requirements associated with the insurance industry have long posed a significant obstacle for insurance investors seeking access to private credit strategies. Rated-note feeder fund structures primarily use debt as opposed to equity and thereby become more compliant with the demanding regulatory regimes governing insurance industries.

Greg and Jason explain that while investing in rated-note feeder funds provides insurance companies with more favorable regulatory treatment, the structure’s inherent complexity and reliance on external rating agencies produce challenges of their own. They explore the different structuring options for rated-note feeder funds, how the product meets the regulatory needs of insurance companies, and how managers can navigate the ratings agency process.

“Generally, debt is better than equity from that perspective, and note feeders allow the investment to be recast primarily as debt in a relatively painless way.These structures can be a win-win in the sense that they let insurers access these strategies in a more regulatory capital-efficient manner,” says Jason.

“One of the biggest considerations is the operational requirements for these types of structures. If you are outsourcing it, you need to make sure your fund administrator has the systems and capabilities to support it, because it is vastly different to a simple closed-ended capital equity structure. You have got to be able to model it out appropriately, support the reporting to the rating agencies and manage the structure efficiently and cost effectively,” explains Greg.

Learn more about the unique advantages rate-note feeder funds hold for insurance companies by reading the full article here or downloading it below.