Don’t Rent an Asset Manager’s Talent. Buy the Manager.

“I think this will be a trend,” says Aflac’s investment chief Eric Kirsch, who just bought a piece of Varagon Capital.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Aflac’s investment team wanted more exposure to middle-market lending, so it bought part of a middle-market lender.

The insurer announced a definitive agreement Wednesday to purchase a significant non-controlling stake in Varagon Capital Partners for an undisclosed sum.

Global chief investment officer Eric Kirsch sees three options for expanding Aflac’s $120 billion portfolio further into private markets, he told Institutional Investor in an interview. “You can build teams, outsource the capital, or take an equity stake in an asset manager. If we’re going to entertain those private market opportunities, we should look at all three approaches.”

Kirsch and his team knew the competitive landscape of private lending, and had been in occasional but not close contact with Varagon. When a stake in the manager went up for sale, it caught their attention.

“We thought, ‘That’s interesting,’” says Kirsch. “We have a fair amount of capital, we like this asset class, and given that we have the scale, it may be more economical to take an equity stake in this asset manager.” But such a deal involves even more due diligence than a typical private equity transaction, because the institutional buyer is exposed on two fronts.

Don’t invest in a manager you wouldn’t invest with, Kirsch cautioned. “Whether or not we want a given equity stake, the first question is: Would they be a manager we would invest with?”

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Aflac has committed up to $3 billion for a middle-market loan portfolio run by Varagon, to be deployed over years. By any measure, that’s a major mandate win.

Varagon’s chief executive officer Walter Owens said the firm appreciates “the recognition of our expertise as an asset manager,” according to the announcement. “This partnership will allow us to further build on our proven broad-based direct origination capability and rigorous underwriting process while meeting the needs of our borrowers for proprietary middle-market corporate loans.”

Aflac won’t be meddling in the day-to-day running of Varagon, Kirsch said, but will have seats on the board. “Given my and others’ extensive background in asset management, we think we can be helpful in moving Varagon forward and growing their business.”

Ultimately, Aflac’s balance sheet and stakeholders will be better off owning than renting specialized investment talent, Kirsch concluded. “Some people don’t have those resources. We at Aflac do. I think it will be a trend.”