Robert Groves, chief investment officer at Friends Life said more than 10% of the UK insurer’s annuity portfolio, which is between £12bn to £13bn, could be allocated to private placements.

Private placements are long-term, non-bank debt financing which are particularly useful for mid-sized businesses and infrastructure projects.

Groves told Markets Media that Friends Life had been involved in private placements for between three and three and a half years. The insurer began with loans for commercial real estate and infrastructure loans but has since expanded into corporate loans.

He estimated that Friends Life has invested approximately £500m in private placements and this is likely to grow.

“We have a £1bn allocation which has not yet been filled,” Groves added. “In the long-term, potentially more than 10% of our annuity portfolio, which is £12bn to £13bn, could go into private placements.”

Groves said the insurer had been focussed on sterling public placements in order to match its liabilities, but it is now also looking into euro and US dollar markets.

Last month Friends Life said in its third quarter interim management statement that a further £125m was invested in private placements during the quarter, bringing the total invested in illiquid assets this year to £280m, and that the firm is considering further investments.

The UK government last week announced a new exemption from withholding tax for interest on private placements which Groves believes will help kickstart the overall market in the UK and bring in new investors.

Daniel Godfrey, chief executive of the Investment Management Association, said in a statement: “This measure is a significant boost to the development of the UK private placement market – unlocking crucial capital for UK businesses. The IMA’s members are major investors in UK businesses and infrastructure; having worked closely with members, we can announce that over the next five years Allianz Global Investors, Aviva, Friends Life, Legal & General, Prudential and Standard Life intend to make investments of around £9bn in private placements and other direct lending to UK companies.”

Groves said the US private placement market is worth approximately $50bn, while the UK is significantly smaller.

“Private placements will still be attractive even if rates rise,” Groves added. “We need to match a long book of illiquid liabilities and diversify our portfolio. Private placements are a natural evolution for insurers and firms have been building up their capabilities.”

In addition to adding yield, diversification and better matching of liabilities, private placements are attractive as they are bespoke instruments which allow the terms and conditions for each loan to be set individually.

“We can get better credit protection and covenants,” added Groves. “For corporates it can be expensive to issue bonds and they get a long-term investor while we get to put capital to work.”

Groves said there is no overall return target for the private placements portfolio.

“We make sure we are paid for illiquidity,” he added. “Returns differ on a case-by-case basis and need to add either yield or security to our portfolio.”

The insurer can use Friends Life Investments when reviewing deals but also uses external fund managers. In November last year Friends Life awarded a a £500m infrastructure mandate to Metlife Investment Management in the US. In July last year the insurer gave a £500m commercial real estate loan mandate to Pricoa Mortgage Capital, part of Pramerica Investment Management.

Groves remains optimistic for the economic outlook next year.

“I am fairly optimistic for the UK and US and we have stronger view on fundamentals than some other commentators,” he said. “In Europe we are optimistic there will be a return to growth but there are downside risks.”