AXA IM arm raises $2.5 billion to invest in bank risk transfer trades

By Sinead Cruise

LONDON (Reuters) - AXA IM Alts, the alternative investment arm of French insurer AXA, has raised $2.5 billion to pursue deals in the fast-growing market for bank risk transfers, as more lenders look to cash in on rising investor interest in their loan books.

A total of 46 investors have provided the firepower, which comprises $1.3 billion in capital raised for its Partner Capital Solutions 9 Fund, and a further $1.2 billion from parallel separate managed accounts, including mandates from large Danish pension funds and the Arizona State Retirement System.

A rising number of global banks are using privately-negotiated Significant Risk Transfer (SRT) transactions to offset regulatory capital requirements imposed by watchdogs.

By transferring the risk of loss on a loan or loan portfolio to an investor, banks can reduce the capital they must hold on their balance sheets against that exposure, enabling them to redeploy that capital elsewhere, potentially in another loan or a return to shareholders in the form of a dividend.

SRTs offer investors access to stable cash flows generated by performing loans, often at attractive spreads, potentially diversifying their returns from other direct lending activities.

Pointing to significant growth in the last two years, Deborah Shire, deputy head of AXA IM Alts, told Reuters said the SRT market was now "too big to be ignored."

"European banks have utilised SRT issuance to optimise balance sheet management for some time now, and north American lenders will add to the momentum, especially since the Federal Reserve clarified the conditions allowing the capital relief for SRT deals directly issued by originating banks," she said.

Demand from investors seeking to expand their holdings of private debt via SRTs would also continue to grow, she said, because the instruments offered access to opportunities many would otherwise struggle to access in direct lending markets.

"We would expect the market for SRTs in the medium term to double in size from $250 billion to $500 billion," Shire said.

"At its beginning, the European market centred on portfolios of large cap revolvers and now the market has expanded to many other asset classes such as SME (small and medium-sized enterprise) books. We expect the U.S. market to echo that."

Shire said the Partner Capital Solutions 9 Fund would still only strike risk transfer trades on performing loan assets, although other market participants were exploring the non-performing loan space.

AXA IM Alts, which has around $198 billion of total assets under management, has struck 110 SRT deals with banks since its Alternative Credit platform was launched in 2000. That business now manages more than 58 billion euros ($62.76 billion) of alternative credit assets.

($1 = 0.9241 euros)

(Reporting By Sinead Cruise; Editing by Christina Fincher)