KKR is looking to make a big push into life insurance with a $4.4 billion acquisition. Here's why private-equity giants keep elbowing in on the $30 trillion insurance industry.
Private-equity firms are starting to look a bit more like insurance investor Berkshire Hathaway. KKR this week announced plans to acquire Global Atlantic Financial Group, paying $4.4 billion in a deal that, subject to regulatory approval, would place the insurance giant on KKR's own balance sheet. It marks the next phase of PE's move into the $30 trillion global insurance industry, as PE shops expand their relationships with insurers, taking them from limited partners to managing their entire businesses. Private-equity firms have been drawn to the permanent capital insurance giants bring to the table. Visit Business Insider's homepage for more stories.
Private-equity firms are starting to look a bit more like Berkshire Hathaway as they tack on insurance arms to their expanding lists of assets. That was the observation of Columbia Business School professor Donna Hitscherich, who attributed the push into insurance to the PE industry's explosive growth since the 1980s, when their bread and butter was buying companies outshined by corporate conglomerates that weren't getting much attention, and fixing them up before selling them off. Now, they're getting into far less sexy financial products that deliver a consistent stream of fees, albeit at a lower rate of return — like insurance. "We are quickly getting into private equity for the masses," said Hitscherich, who pointed to recent guidance by the Department of Labor that allowed certain defined-contribution retirement plans such as 401(k)s to access private equity. "The more assets you have under management, it's harder to create returns," she explained. "I wouldn't say they are victims of their own success, but they just keep getting bigger and bigger." The latest push could be seen this week when KKR announced that it would buy Global Atlantic Financial Group, which sells and manages life insurance and retirement products. The $4.4 billion deal will give KKR around 60% economic ownership, and boost its assets under management in insurance to $97 billion from $26 billion. The deal, which is subject to regulatory approval, would position KKR next to investment behemoths Apollo Global Management, Blackstone, and The Carlyle Group, all of whom continue to turn around companies like the old days, but are now diversifying their portfolio with fixed annuities and long-term life insurance products. "It helps sustain their management fee growth at a double-digit rate," said KBW analyst Robert Lee of the Global Atlantic deal. "To the extent that they are managing all of the assets of the insurance company, they have pretty good growth." Read more: Uber-rich investors hungry for growth have turned their sights on the private market. Here's how wealth firms like Citi and UBS are transforming their businesses to meet those client demands. The lure of permanent capital for private equity KKR's expanding assets — and stable management fees that come with it — are perhaps the most attractive features of buying an insurance company with no short-term intent to sell it. Another draw, analysts said, was the permanent capital that would now be locked up with KKR, allowing it to invest on behalf of Global Atlantic without having to continuously raise money from outside investors. Its growing pie of permanent capital — which the deal will bring from 9% to 33% of KKR's overall assets under management— means the firm can focus more on expanding Global Atlantic's business through acquisitions and increased sales of existing products, rather than fundraising, people familiar with the deal said. Already, Global Atlantic more than doubled its assets between 2014 and 2019, as the aging population in the United States kept buying annuities and life insurance plans. Now, KKR co-president Scott Nuttall said in a Wednesday call announcing the deal that he would supercharge its growth. "We believe we can help GA grow even faster going forward," Nuttall said Wednesday, "through helping generate even better investment returns, and using our network to access capital to fund more organic and inorganic growth." Why private equity has been pushing into life insurance The deal marks the next phase of PE's toehold in the $30 trillion global insurance industry, a stake that has grown larger since 2009 when Apollo partnered with former American Insurance Group executive James Belardi to start creating Athene Holdings. Since then, Apollo has bought other insurance assets — notably, Aviva USA in 2013 — and increased its stake in Athene, to 35% from 17%. Others have taken note. Blackstone got in on the game in 2017 when it bought fixed annuities and life insurance business Fidelity & Guaranty Life, now known as FGL Holdings Inc, for $1.87 billion. After announcing a broader push into insurance last year, Blackstone sold the business to Fidelity National Financial for $2.7 billion. The Carlyle Group bought a 19.9% stake in DSA Reinsurance — a reinsurance company with life and annuity insurance, but also property and casualty — from AIG in 2018. It increased its stake in 2019, taking a majority stake in the company, rebranded as Fortitude Re. "We have relationships with many insurance companies, and several of them have capital tied up in products they sold years ago that are dragging down returns. We also have this great connectivity to world-class investors that might appreciate a new class of asset or risk to add to their portfolios," said Brian Schreiber, managing director and co-head of Carlyle Global Financial Services Partners. "At Carlyle, what we do best is originate superior value assets, many illiquid and long dated, that match well with those long-dated insurance cash flows," he added. Some of the largest life insurers have increasingly put investment dollars into the hands of private-equity firms, PE experts say. Their businesses rely on collecting premiums from individuals, and then investing it wisely — enough to cover claims at the date of mortality events. So, as interest rates have remained low, insurers have looked to alternative assets to invest, which yield higher returns than plain vanilla corporate bonds. While insurers are often limited partners in PE funds, entering into an outright acquisition takes the relationship to another level, allowing the PE investor to manage all of the assets and scope out new opportunities for growth. And, of course, take a cut of its earnings. Read more: Goldman Sachs-backed fintech Even Financial just bought a life insurance startup. Here's why that bet could pay off as policy applications soar. KKR's acquisition puts Global Atlantic on the books But there are downside possibilities as well. In KKR's purchase of Global Atlantic, observers noted that the PE shop was buying the majority of the insurance business and placing it on its books — a change in approach from how Apollo, for instance, has managed Athene as a minority stakeholder. Such a maneuver will mean taking on a bit more risk versus taking a minority stake and keeping it off its balance sheet, one analyst, Autonomous Research's Patrick Davitt, noted. Global Atlantic's earnings will now appear as a line item in KKR's balance sheet, he said. A line item, though, is a far cry from KKR becoming an insurance giant itself, others pointed out. That's a point that came through in the Q&A portion of KKR's deal announcement on Wednesday, when co-president Scott Nuttall characterized the transaction as more of a partnership than an acquisition. "We do not think about this as acquiring an insurance company, per se," he said. "We think about this as acquiring the majority of an insurance company, where we can partner together, and we can help them increase their investment returns — which should, in turn, allow them to increase their growth." So, as far as the Berkshire Hathaway references go? "This is not KKR becoming an insurance company," Nuttall said. Read more:
It's only going to get harder for private-equity giants to find cheap things to invest in, and that will be a huge drag on returns over the next decade Big investors like Apollo and Carlyle are clamoring for a piece of the $30 trillion ESG space. We spoke to 15 insiders about how they're ramping up hires, raising money, and striking data-driven deals.
Disclosure: KKR is a large shareholder in Axel Springer, which owns Business Insider.SEE ALSO: Private equity bet billions on live entertainment in 2019. Here's how the coronavirus has turned that investment thesis on its head. SEE ALSO: Uber-rich investors hungry for growth have turned their sights on the private market. Here's how wealth firms like Citi and UBS are transforming their businesses to meet those client demands. SEE ALSO: Private-equity hiring is getting upended. From senior execs jumping ship to new timelines for scouting junior talent, 6 recruiters lay out what to expect. Join the conversation about this story » NOW WATCH: Why thoroughbred horse semen is the world's most expensive liquid
More like this (3)
Here's why big investors like Goldman Sachs, KKR, and Blackstone are betting billions on data centers
Summary List Placement Scrolling through videos on social media may seem like carefree fun, but the...Summary List Placement Scrolling through videos on social media may seem like carefree fun, but the logistics behind it are an increasingly serious business. ByteDance, the China-based parent company of the social media streaming service TikTok, has leased 53 megawatts of data-center space across three locations in northern Virginia, a source with knowledge of the transactions said, facilities that could consume more annual power than 25,000 homes. That's on top of 9 megawatts ByteDance leased in 2019, according to data from DataCenter Knowledge. The company, which has come under scrutiny in recent months from the Trump administration, is just one among an expanding universe of businesses for whom data centers are key. In Totowa, New Jersey, meanwhile, Digital Realty Trust, a $41 billion public real-estate company that is one the country's largest data-center developers, has broken ground on a sprawling 600,000-square-foot complex after locking down a major commitment from Bloomberg LP, the financial data and media firm, several sources with knowledge of the transaction said. A spokesman for Bloomberg did not immediately respond to a request for comment. ByteDance did not respond to an inquiry about its data-center deals. The transactions are just the latest activity in a booming sector that straddles both the technology and property markets. Data-center demand has dramatically risen in recent years thanks to a host of drivers. Those include the growing consumption of storage-heavy streaming content, the proliferating internet-of-things that has connected everything from cars and appliances to remote software and systems, and also the increasing migration of businesses to cloud based storage and applications. Read More: We talked to 8 studio execs, investors, and brokers about the big money pouring into film and TV production spaces. Here's a look at the opportunities — and risks — for this hot real-estate play. The coronavirus pandemic, while causing other areas of the real estate industry such as retail and hotels to wilt, has only given lift to the already surging sector, experts say. The audience data firm Nielsen, for instance, reported that US consumption of streaming content rose more than 30% through the first three quarters of the year to 7.1 trillion minutes as lockdowns and lingering virus concerns have encouraged more viewers to watch from home. And as companies continue to put off a return to the office, more have scrambled to move more of their data and operations from onsite servers into the digital ether so that they can be more readily accessible to employees working remotely. The lynchpin behind all of it are tens of thousands of megawatts of data centers. Big investors like Goldman Sachs and Apollo are jumping in The demand has given a boost to established players in the industry, including public companies such as Digital Realty Trust and Equinix, the largest data center company by market value at over $71 billion. Shares of data center REITs have risen on average by about 25% this year, according to the REIT investment and research firm Cohen & Steers, compared to an overall 12% decline in the broader REIT market, which has been battered by the virus crisis. The industry's performance has also caught the attention of major investment firms that want to make inroads into the lucrative business. On Tuesday, Goldman Sachs announced it had hired Scott Peterson, the former chief investment officer of Digital Realty Trust, and Goldman's merchant banking division plans to invest $500 million from an infrastructure fund to make up to $1.5 billion of data center acquisitions in the US and around the globe. Read More: Real-estate developers are building costly cold storage space before they even have tenants lined up. They're betting the risky move could be a winning investment as grocery deliveries surge. Other bluechip investors have crowded into the market as well. Apollo Global Management announced last week that it purchased a portfolio of nearly 500 existing cellular towers and hundreds of additional tower sites that are under development. That infrastructure is seen as closely linked to the data center business, especially with the arrival of 5G, whose faster speeds will require both more transmission infrastructure and storage space and increasingly seamless connections between the two. In May, KKR said it would invest $1 billion from an infrastructure fund it operates to build and buy data centers in Europe in a venture called Global Technical Realty. And last year, Blackstone announced it had acquired a 90% interest in seven data centers in Virginia owned by the property REIT Corporate Office Properties Trust in a deal that valued the buildings at $265 million. "Global internet traffic has grown 20% to 30% per year and the amount of data in data centers is growing at about the same pace," said Nadeem Meghji, the head of US real estate investments for Blackstone. "And with the arrival of 5G, you'll see the consumption of even more content from people's phones and devices." Meghji also expected broad demand from businesses across the economy to continue to fuel growth. "Only 30% of companies have moved their data storage off premises into a data center so far," Meghji said. "That adoption will grow." Data centers require enormous amounts of power Unlike other property types that have attracted robust investor interest in recent years, such as warehouse space, data centers can be particularly complex and expensive to operate and build. Most require enormous supplies of power, backup generators to prevent outtages, robust ventilation systems to cool football field sized rooms crammed with servers that can reach ovenlike temperatures, and connectivity to established networks of fiber optic cabling that serve as the nation's superhighways for data. Development has nonetheless boomed as capital has flooded in. "You're getting pension funds investing in data centers now, which is a huge change from a few years ago," said Steve Berkman, a real-estate attorney at Paul Hastings in San Francisco who has worked on data center deals on the West Coast. The amount of new colocation capacity in leading data center markets such as Northern Virginia, Dallas, Silicon Valley, and the New York area grew by 5% in the first half of the year to 2.7 gigawatts of total inventory, according to data from CBRE, about 20% of the power consumed by all of New York City. Colocation spaces are akin to the coworking business in the office sector, offering takers flexible space in which to grow their data footprint. They are only a segment of the larger market. Huge data consumers have also been active building and leasing their own facilities. Facebook recently began operating in a $1 billion data center it built in Henrico County in Northern Virginia, the country's largest and most active data center market. The social media giant has outlined plans to more than double the size of the complex. Even more space is on the way, with about 373 megawatts of colocation facilities under construction, CBRE said. All of that supply has put a modest strain on pricing in the industry, with average charges falling from $129 per kilowatt of monthly power consumption to $121 in the first half of the 2020 in those prime data-center markets, according to CBRE. Developers have compensated for tightening profits by building and operating space more economically. Some data-center companies have even begun to experiment with the idea of submerging servers in tubs of mineral oil, which is more efficient at dispersing heat than air and can reduce hefty cooling costs. Microsoft has tested underwater data centers. "A decade ago, the rule of thumb was it cost $40 million a megawatt to build," said Pat Lynch, a senior managing director at CBRE who oversees the company's data center solutions group. "Today it's a quarter of that, so there's still a healthy margin in the business even if prices fall slightly." How a big supply pipeline is changing the competitive landscape The tightening economics and the large pipeline of supply are expected to prompt consolidation in the industry, allowing major players to enhance profitability by gaining economies of scale through acquisitions that avoid the risks of building from the ground up. Digital Realty Trust, according to several sources, was in talks, for instance, to purchase the $8.9 billion rival data center REIT Cyrus One last year, although the deal appeared to fizzle earlier this year. The data-center industry's tenancy is dominated by huge customers such as Amazon Web Services, Microsoft Azure, Google, Oracle, and IBM, which use the facilities both for their own operations and multi-billion dollar cloud computing and storage businesses that cater to corporate and government clients. Smaller companies too have found a niche, highlighting the diverse ecosystem of users behind the demand for data center space. Data Canopy, a Maryland-based cloud-storage provider, has leased space in 16 data center locations across the country totaling about 10 megawatts that cater to small customers. Ryan Barbera, the company's founder and CEO, said he expects its footprint to as much as double in the next year and revenue to pick up by 30% or more. He is already contemplating a first fundraising round for the company. "2020 has been pure growth for us from a business standpoint and the best year that we have ever had," Barbera said. "When Covid happened we frankly began implementing a lot of austerity. Instead, companies that in the past talked about a cloud transformation made the move after realizing it's just as important or more important than other areas of their business at a moment like this." Disclosure: KKR is a large shareholder in Axel Springer, which owns Business Insider. Have a tip? Contact Daniel Geiger at firstname.lastname@example.org or via encrypted messaging app Signal at +1 (646) 352-2884, or Twitter DM at @dangeiger79. You can also contact Business Insider securely via SecureDrop. SEE ALSO: We talked to 8 studio execs, investors, and brokers about the big money pouring into film and TV production spaces. Here's a look at the opportunities — and risks — for this hot real-estate play. SEE ALSO: Meet the 4 dealmakers driving Blackstone's $325 billion commercial real estate portfolio. They walked us through how they're thinking about opportunities in the downturn. SEE ALSO: Nasdaq's CEO says the cloud is the 'future of the industry' and the tech could be used to conduct actual trading within the next decade Join the conversation about this story » NOW WATCH: July 15 is Tax Day — here's what it's like to do your own taxes for the very first time
A company that lets anyone rent an RV just raised over $100 million as RV and road travel continues to skyrocket in popularity
Summary List Placement RV rental platform RVshare has raised over $100 million from KKR and previous...Summary List Placement RV rental platform RVshare has raised over $100 million from KKR and previous investor Tritium Partners, according to a news release from RVshare. This investment comes at a time in which RV rental companies and makers have stayed resilient amid the coronavirus pandemic that has otherwise tanked the travel industry. RVshare is just one example of this general massive industry growth: from early April to May 19, the rental platform saw a 1,000% increase in bookings. "I think we're going to see a lot more demand," RVshare CEO Jon Gray told Business Insider in June. "I think you're now getting a new group of people buying them, which has people who are substituting it for more luxurious vacations that they typically took." Gray's previous prediction has so far been correct. According to RVshare's news release in September, the company saw fall bookings increase 123% year-over-year. According to RVshare, this over $100 million investment will allow the peer-to-peer rental platform to tap into KRR's "network" and "resources," and grow the company as the industry continues to boom. See more: KKR is making a big push into the $30 trillion insurance industry — here's why private equity is starting to look more and more like Berkshire Hathaway "I am very proud of our employees and thankful to our customers for helping build RVshare into the market leader it is today – and we are only at the beginning of where our business can go," Gray said in a statement about the investment. "This financing and the support of KKR's global platform positions us well to invest in future growth and provide the best experience for our owners and renters."SEE ALSO: RV makers are rushing to add office, desk, and WiFi options to cater to the new 'work from anywhere' crowd created by the pandemic Join the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence
Why Morgan Stanley's $7 billion bid for a storied asset manager gives it a 'remarkable leg up' on rivals and signals more deals to come (MS)
Summary List Placement Sustainable investing, big stable businesses, utter size, and tailored products for investors: Morgan...Summary List Placement Sustainable investing, big stable businesses, utter size, and tailored products for investors: Morgan Stanley's move to buy Eaton Vance at a premium is a deal made for modern Wall Street. The New York investment bank said Thursday it would acquire the Boston-based investment manager, which oversees some $500 billion in assets, and its affiliates in a deal worth $7 billion in cash and stock. Coming just six days after Morgan Stanley closed on its all-stock E-Trade acquisition, the deal highlights the bank's transformation toward more stable operations from once-core sales and trading under Chief Executive James Gorman within an industry that has shifted significantly since he took the reins a decade ago. The tie-up would create a $1.2 trillion asset management behemoth alongside Morgan Stanley Wealth Management, one of the largest wealth managers in the world with 15,400 financial advisors and nearly $2.7 trillion in client assets as of the end of June. Eaton Vance would beef up Morgan Stanley's position in customizable fund offerings, with Eaton Vance's Parametric funds, and sustainable investments, through its well-known Calvert investment manager and research business, industry analysts and consultants said in interviews. Read more: Morgan Stanley snaps up asset manager Eaton Vance in $7 billion takeover as its buying spree continues "Gorman's strategy over the last 10 years, but especially in recent years, has been to enhance its wealth and investment management position," Ken Leon, a bank analyst and director of equity research with CFRA Research in New York, said in a phone interview on Thursday. "But in terms of scaling investment management with funds, it would be difficult to do that organically. With acquisitions, they are able to move up the league tables in terms of asset management," Leon said. For Morgan Stanley, pairing its monster force of advisors with more products On a conference call to discuss the deal with analysts on Thursday morning, Gorman said the tie-up fit into Morgan Stanley's shift to "more balance sheet-light, more durable businesses." Gorman has previously emphasized wealth management's stabilizing effect on the bank, which was in dire straits coming out of the great financial crisis. Its wealth business is known as a global force. But by size, its $665 billion asset management business isn't the same titan as the largest asset managers like BlackRock (managing some $7.3 trillion assets) and Vanguard (with some $6.2 trillion at the start of the year). "I think it gives it a somewhat remarkable leg up on the competition," said Neil Bathon, the founder of asset management research and consulting firm FUSE Research Network, in an interview on Thursday. Bathon emphasized the benefit for Morgan Stanley of having Calvert's capabilities, with sustainable investing products for clients a growing trend, one that has attracted a record amount of flows this year. And he called the Eaton Vance-owned Parametric mutual fund family, comprised of custom-made separately managed accounts, a "prize" in this deal. The availability for customization and tailor-made products for clients over cookie-cutter options is a major industry trend, Gorman said on the call with analysts on Thursday. "Its products speak to the generational requirements of today's investor — responsible investing, data-driven, and customized solutions," Michael Spellacy, senior managing director for capital markets at Accenture, told Business Insider. Read more: Big investors like Apollo and Carlyle are clamoring for a piece of the $30 trillion ESG space. We spoke to 15 insiders about how they're ramping up hires, raising money, and striking data-driven deals. But Eaton Vance couldn't "distribute it enough in a way that gets a profitability advantage," and Morgan Stanley has the built-in network, he said. Morgan Stanley, for its part, is already the largest distributor of Eaton Vance funds, Gorman told the Wall Street Journal. One East Coast-based Morgan Stanley financial advisor, who requested anonymity because he was not authorized to speak with a reporter, said he was most interested in the fixed-income capabilities Eaton Vance could bring to the firm, along with Parametric. As consolidation takes the industry by storm, insiders expect more to come The deal, which the firms expect to close during the second quarter of 2021 and sent shares of Eaton Vance and other publicly traded asset managers higher on Thursday, is the latest sign of widespread consolidation in the money-management industry. Mid-sized asset managers have been pressured as fees for products and services in the space have plunged in recent years, driving a need for size to eke out profits. Franklin Resources bought Legg Mason earlier this year, and the Wall Street Journal reported in late September that activist investor Trian Fund Management was building stakes in asset managers Invesco and Janus Henderson with an eye to consolidation in the industry. Read more: Franklin Resources and Legg Mason's $4.5 billion merger is the latest in a wave of asset manager M&A — here are 4 more potential takeover targets "You can expect waves of consolidation in asset management because most of the product is the same. You can't carve differentiation unless you have world-class distribution," Accenture's Spellacy said. Over the summer, Gorman foreshadowed that a deal in the space would be coming during a virtual conference the bank hosted, according to a transcript on the investment research platform Sentieo. The firm wasn't done with acquisitions after E-Trade, he said. "Gorman's cementing his legacy," one Morgan Stanley wealth advisor said. SEE ALSO: Big investors like Apollo and Carlyle are clamoring for a piece of the $30 trillion ESG space. We spoke to 15 insiders about how they're ramping up hires, raising money, and striking data-driven deals. SEE ALSO: Franklin Resources and Legg Mason's $4.5 billion merger is the latest in a wave of asset manager M&A — here are 4 more potential takeover targets SEE ALSO: Why Morgan Stanley, which has 15,000-plus financial advisers catering to the super-wealthy, is buying a discount broker known for its talking baby ads Join the conversation about this story » NOW WATCH: What makes 'Parasite' so shocking is the twist that happens in a 10-minute sequence