Two articles of faith define private equity: use other people’s money and swing for the fences when it comes to returns. KKR, the group that practically invented the buyout industry, now has other ideas. On Wednesday it announced the $4.4bn acquisition of life insurer Global Atlantic, a business Goldman Sachs built over several years.
KKR’s rival Apollo first appreciated the opportunity in managing insurance assets. Blackstone waded in later. Insurance and annuity liabilities are typically invested in credit products, earning say 5 per cent. That is a far cry from the 25-30 per cent leveraged buyout funds aim for. And while Apollo and Blackstone have arm’s length relationships with insurers, the house of Kravis and Roberts will make its biggest ever balance sheet bet by owning Global Atlantic outright.
KKR hopes to profit in two ways from Global Atlantic. First, it expects to earn $200m in annual management fees. This will come from selecting and even underwriting debt instruments the buyout group imagines will earn higher returns for Global Atlantic without excess risk.
That will bring a second to benefit to KKR, via the spread between what policyholders get paid and what investments earn. KKR expects that its proportion of Global Atlantic profits will begin at $500m annually. There is, of course, a natural tension between how much KKR charges Global Atlantic in charges and those earnings.
The performance fees for earning mid-single digit returns are not astounding. But insurance premiums count as the fabled “permanent capital”. The proportion of KKR’s firepower meeting that description will hit a third, as assets under management jump from $207bn to $279bn.
KKR paid one times book value for Global Atlantic, a reasonable price but nothing like the steep discounts Apollo benefited from when it invented the strategy a decade ago. There is another timing issue: an explosion in private credit may be reducing the opportunities KKR will have to deploy capital.
The buyout group is, importantly, putting its money where its mouth is. That appears to be good enough for shareholders. KKR shares jumped nearly a tenth on Wednesday, an implied gain of about $2bn.
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