Uncorrelated
Where Investors Are Looking Beyond Traditional Credit in 2027
As Nordic and European institutions finalise their strategic asset allocation for 2027, one question keeps coming up: where can a portfolio find returns that do not simply move with credit, rates and the dollar?
The past two years have tested the classic diversifiers. A weaker dollar weighed on returns from US assets for European investors, and several Nordic pension funds have openly rebalanced from US to European government bonds.
In our conversations with investors this autumn, three themes stand out: a more selective approach to senior direct lending, insurance risk as a genuinely different source of return, and insurance itself as an asset class.
1. Senior direct lending: selectivity over scale
European direct lending has matured into a core allocation for many institutions. As the market has become more competitive and matured competition, spreads in the European mid-market have compressed and its effects are clearest at the larger end of the market. Across Europe, the share of covenant-lite loans rose from 6% in 2023 to 35% in 2024, and average leverage at entry has crept back up from 4.3x in 2023 to 4.6x in 2025 (Proskauer, Private Credit Insights).
The lower end of the market looks quite different:
Segment (company EBITDA) | Typical margin | Leverage | Loan-to-value | Avg. covenants |
|---|---|---|---|---|
Lower mid-market (below €25m) | 6.00–7.00% | 3.0–4.5x | ~30–40% | ~2 |
Core mid-market (€25–75m) | 5.00–6.00% | 4.5–6.0x | ~40–50% | ~1 |
Upper mid-market (above €75m) | 4.75–5.75% | above 6.0x | above 50% | ~0 |
Sources: Mergermarket (May 2015 – May 2025), Lincoln International market data.
Smaller companies borrow less, lenders still secure full covenant packages, and margins are higher. Size itself is a weak predictor of default: in Moody's analysis, leverage carries the most weight in default risk (around 26%), while company size carries the least (around 6%).
That does not make the asset class less attractive. It makes manager selection matter more. The questions we hear most often are practical ones:
• Where is the manager in the capital structure? Senior, secured and cash-flow paying remains the anchor for most institutional portfolios.
• How does the manager behave in a downturn? Restructuring capability and workout experience are now as important as origination.
• Is the manager's capital meaningful to the borrower? Established mid-sized managers, often less visible in the Nordics than the global platforms, can offer better access and terms.
For 2027, we expect investors to look beyond the largest names towards experienced European managers in the lower mid-market, where structure, not size, does the work.
2. Insurance risk: a different driver of return
Catastrophe bonds pay investors to take on the risk of defined natural catastrophes, such as US hurricanes or European windstorms. Their returns depend on whether those events occur, not on the economic cycle. That is why they held steady in the first half of 2025 while tariffs and currency moves unsettled equities and credit (Artemis).
The market as a whole had a strong year. The Swiss Re Global Cat Bond Performance Index returned 11.40% in 2025 (Artemis), and cat bond spreads remained above those of high-yield credit. Past market returns are, of course, no guide to the future, and the asset class carries genuine event risk.
For institutional investors, the key questions are about how tail risk is managed: diversification across perils and regions, position sizing, and the manager's modelling discipline.
There is also a regulatory point to watch. In June 2025, ESMA recommended that cat bonds should no longer be eligible for UCITS funds. The recommendation is non-binding, and the European Commission's process is expected to take several years (Artemis). Investors using UCITS vehicles should follow it, but it is a question of structure rather than of the underlying risk.
3. Insurance as an asset class
The third theme goes one step further: owning insurance businesses themselves. European insurers increasingly sell closed books of policies, known as run-off portfolios, to free up capital and simplify their balance sheets. Specialist buyers acquire these books and manage them to maturity.
The returns come from managing claims and capital efficiently over many years, not from market direction. That makes the strategy a natural fit for patient capital. It is no coincidence that family offices and other long-term investors have been among the most active participants.
The strategy is less familiar to many Nordic institutions, and it requires specialist insurance and regulatory expertise. For investors with a long horizon, it offers a way to earn returns tied to the insurance industry's own restructuring.
What this means for 2027
None of these themes replaces a core credit allocation. What they add is diversification and decorrelation from traditional credit and the wider market cycle.
The common thread is selectivity. In each area, the gap between specialist and generalist managers is wide, and the most interesting opportunities often sit with experienced European firms that are less visible from Copenhagen, Stockholm or Oslo.
We will be in Copenhagen and Stockholm throughout the autumn and are always happy to compare notes.
This article is for information purposes only and does not constitute an offer or investment advice.
Sources
• Swiss Re Global Cat Bond Performance Index returns 11.40% for 2025 (Artemis)
• Cat bonds deliver in 2025, demonstrate low correlation (Artemis)
• ESMA UCITS cat bond issue (Artemis)
• Proskauer, Private Credit Insights 2024 (European market)
• Mergermarket transaction data, May 2015 – May 2025
• Lincoln International, European mid-market pricing data
• Moody's, analysis of loan default risk factors