KKR’s acquisition of Global Atlantic shows PE’s attraction to float & sidecars

Private equity and alternative investment giants of the world are increasingly demonstrating why access to insurance premium float, as a form of assets under management, is an attractive prospect, with KKR’s acquisition of Global Atlantic the latest clear example. It also shows their appreciation for bringing third-party capital into re/insurance.

As we explained when the deal was announced in early July, private equity and buyout giant KKR & Co. L.P. (or Kohlberg Kravis Roberts) was clearly showing its appetite for insurance-linked returns with its plan to acquire life and retirement focused insurance and reinsurance firm Global Atlantic Financial Group.

It’s not just the underwriting returns, as you’d expect from an insurance-linked securities (ILS) style investment, that attracts private equity giants like KKR to these types of transactions.

The long-term, almost permanent nature of the capital generated from insurance premiums, which is converted to assets under management (AUM) to fund its buy-out business, are a very attractive prospect and even for a firm like KKR can be relatively transformational in how they ramp up its scale.

As a result, the returns generated are not from the underwriting, or product offering, but are multiplied by the way KKR puts the float-like capital it inherits from the deal to work.

With Global Atlantic set to increase KKR’s AUM by a massive 33% to $294 billion, it’s clear that once put to work in the kinds of transactions KKR enters into, this added capital pile could be transformational for the private equity firms returns and profits.

On a pro-forma basis, KKR estimates that adding Global Atlantic’s business will drive overall assets under management to $294 billion, of which fee-based AUM will rise by 45% to $233 billion and insurance / reinsurance related AUM will rise by an impressive 261% from $28 billion to $101 billion.

KKR categorises the additional capital and AUM that the Global Atlantic deal will bring to its coffers as perpetual capital, which is typically long-dated but due to its nature as insurance or reinsurance premium float and funds, means it is of indefinite nature and could be withdrawn at any time.

After the Global Atlantic deal is done, on a pro-forma basis, KKR said that 31% of its capital assets will fit in this perpetual bucket, but that a huge 84% of the overall $294 billion of AUM will have a duration of at least eight years at inception.

This kind of long-term capital horizon is just what KKR needs to put to work in its private equity and buy-out arrangements, with the Global Atlantic assets set to significantly increase the investment firms firepower.

KKR sees significant growth opportunities for the life and annuities, retirement focused insurance and reinsurance business, not least due to the ageing of societies around the world, as well as the fact more risk is taken by individuals than public entities nowadays.

On an inorganic basis, KKR sees block reinsurance deals as one driver for Global Atlantic going forwards, but also the use of “sidecar funds” that can augment its ability to do even bigger deals.

Global Atlantic launched a co-investment vehicle named Ivy earlier this year, which will operate as a kind of sidecar structure and is funded with $1 billion to invest in life and annuity reinsurance deals.

KKR sees the opportunity to scale these sidecar funds and leverage third-party investor appetite to support doing bigger deals, to help propel Global Atlantic to further growth.

That will deliver more management fee income as well, on top of that already embedded in the existing Global Atlantic business.

Overall, KKR said it expects net management fees to rise by $200 million+ over the next few years as it ramps up its work with Global Atlantic after the acquisition.

Sidecar opportunities have always been attractive to private equity players, but when a sidecar can help to scale up AUM even quicker as well, through the type of deal-flow a structure like Ivy is expected to support, the attraction perhaps grows and shows exactly why KKR and its ilk are so attracted to this space.

Also read: Apollo hits record $414bn AuM thanks to insurance deals & ACRA.