Advanced Credit Solutions (ACS), a small Luxembourg-based finance firm, is behind one of the more ambitious recent experiments in private credit. Working with Apollo Global Management, it designed Fox Hedge — a $5 billion investment vehicle aimed at solving a problem insurers face: how to capture higher returns from private markets without shouldering punitive capital charges.

The Pitch

Insurers traditionally hold safe assets like Treasuries or mortgage bonds, but those generate modest yields. Directly investing in private credit offers far better returns but triggers heavy regulatory capital requirements. Fox Hedge attempts to bridge the gap. Apollo pooled a mix of safer securities and riskier assets such as real estate debt into a Bermuda-based structure, which then issued investment-grade bonds with extraordinarily long maturities — some stretching to 2064.

Most of the debt ended up with Apollo’s own insurance arm, Athene, which Moody’s estimates bought about 86% of the issuance. The senior notes pay around 6%, with junior tranches yielding more than 7% — far above typical investment-grade returns.

Innovation Meets Risk

Fox Hedge borrows from securitization techniques but blurs categories by resembling both asset-backed debt and corporate bonds. That allows it to incorporate a wider range of collateral and in some jurisdictions sidestep restrictions on “re-securitizing” assets. ACS even pledged the vehicle’s management fees as collateral to finance its purchase of the riskiest equity tranche.

Yet the structure raises clear challenges. The bonds’ ultra-long maturities outlast many of the underlying assets, meaning collateral must be rolled over for decades. While diversification across asset types is touted as a strength, valuation transparency is a lingering concern — especially in illiquid private credit markets where prices are hard to pin down.

Regulators Take Notice

Analysts and regulators are watching closely. The Federal Reserve has highlighted insurers’ growing use of complex structures to reduce capital charges, while Moody’s estimates a third of U.S. life insurers’ $6 trillion in assets is already tied to private credit. Insurers most exposed tend to be those linked with private equity groups, such as Apollo’s Athene and KKR’s Global Atlantic.

Market observers note that Apollo has the scale and expertise to engineer such products, but the real test may come if weaker players attempt to copy the model. As Harvard’s Ken Froot cautions, long-duration, opaque assets are especially difficult to value accurately — and the risks only grow when financial engineering becomes widespread.