Northwestern Mutual makes private-credit push with Sixth Street partnership

In the latest example of insurers chasing alternative investment opportunities, Northwestern Mutual has forged an agreement with Sixth Street to invest its assets in a head-turning corner of the private credit space.

Under the partnership, Sixth Street will be overseeing $13 billion of the insurer’s assets, with plans to invest primarily in asset-based finance.

The deal, reported by the Wall Street Journal, is emblematic of a broader trend of institutional investors tapping into private credit via asset-backed lending.

While the private credit space has been largely focused on providing financing for midsize companies to be bought out by PE firms, the trend of insurers giving cash to private debt managers – with the aim of earning enough to meet and exceed their obligations to policyholders – has at least in part driven a shift into more higher-yielding strategies than bonds.

As part of the agreement, Northwestern Mutual will acquire a small minority stake of roughly 10 percent in Sixth Street – comparable in size to the holding Sixth Street repurchased from TPG last year, sources told the Journal. The investment is expected to strengthen Sixth Street’s balance sheet and support its ongoing growth.

Sixth Street’s approach to the partnership differs from many of its publicly traded competitors with asset-based lending investment strategies, opting for a phased approach rather than putting the entire amount to work at once. “If someone gave me $13 billion and said go invest it tomorrow, I might be able to do it, but I probably wouldn’t be able to do it in the best risk-adjusted-return way,” Michael Muscolino, co-founder of Sixth Street, told the publication.

With this latest commitment from Northwestern Mutual, San Francisco-based Sixth Street – which also has a signficant minority interest in the San Antonio Spurs – will reportedly see its assets under management surpass $100 billion.

Sixth Street's interest in asset-based finance – which covers consumer lending such as mortgages, credit-card loans and auto loans – has also grown over the years as banks pared back lending due to regulatory pressures. In line with that, the firm has built up a team of 40 professionals specializing in the space.

While Northwestern Mutual's in-house investment capabilities isn't to be underestimated, given its 165-year history and its $627 billion book of assets, most handled internally, its CIO Jeb Bentley acknowledged that asset-backed finance poses an entirely different challenge.

“The world is changing pretty significantly,” Bentley said. "We see a lot of value in having a partner who can originate and manage the deals for us.”