The Weekly (2/4)

Private equity, the business of investing in companies that are not publicly traded, has been a cornerstone of the capital markets for decades. It has enjoyed strong tailwinds since the depths of the Great Financial Crisis where interest rates stayed low, debt was available, and valuations consistently rose.

As a result of an accommodative market environment, total private markets assets under management (AUM) reached $11.7 trillion as of June 30, 2022, according to McKinsey. 

Firms like Blackstone, KKR, Apollo, and others tell a simple story: private equity, the business of buying companies with debt, is their speciality.

There seems to be a new narrative brewing across these mega institutions and it’s not nearly as glamorous as their billion dollar buyouts and oversized bonuses. That story? Insurance companies.

Private-markets giants are buying insurers on an unprecedented scale. Apollo famously merged with Athene in 2022, KKR recently completed their purchase of insurance company Global Atlantic, while Blackstone, Carlyle, and Brookfield have all partnered with insurance and reinsurance firms alike. 

The trend isn’t necessarily new: private investing in insurance dates back more than 50 years to Berkshire Hathaway’s acquisition of National Indemnity in 1967, but these partnerships are transforming their business models, as they expand their lending operations and sometimes their balance-sheets.

But why are private equity giants acutely focused on insurance? Permanent capital. 

Funds that do not have to be returned to investors on a timetable, are, according to some, the “holy grail” of private investing. Life insurance and annuity companies are one form of permanent capital that is being described as a once-in-a-generation opportunity. 

The balance sheets of life and annuities companies are well stocked with assets (to match the liabilities of future IOUs), but until payout, these assets need to be invested to generate returns. In many cases, the cost of servicing the liabilities is significantly lower than the potential investment return. The spread represents an attractive margin.

Alternative investment firms can apply their investment expertise to the influx of permanent capital to drive higher risk adjusted returns while oftentimes allowing them to scale their credit businesses - a focus for these major players given the higher interest rate environment and new banking regulations. 

It’s not to say the recent trend does not come without risk.

The American insurance industry is mainly regulated by individual states, which lack the speed and resources of larger regulatory bodies. Bespoke, and oftentimes illiquid investments run the risk of a “run on the bank” and researchers at the Federal Reserve have argued that life insurers’ tie-ups with asset managers have made the industry more vulnerable to a shock.

Despite potential risks, the window is firmly open on this once-in-a-generation opportunity—momentum is building, and more investment is sure to come.

It’s an interesting trend that has piqued our interest and it will be interesting to see how it progresses.

Have a great weekend,

- Your Titan team

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