Why do Private Equity Firms View Life Insurance Policies as an Attractive Source of Permanent Capital?

For private equity firms, life insurance policies are an innovative way to increase return and assets under management. 

A decade ago, private equity firms raised temporary funds, having a fixed timeline. Private equity firms would have a short-term horizon like acquiring a company or handling a financial crisis within the firm, after which, the firm would exit the temporary investment. 

Post-pandemic, the scene has changed. As per the private equity trends 2021, private equity firms are now looking at investment funds that bring in permanent capital for them. 

What is Permanent Capital?

Permanent capital comprises investment funds that the firm does not have to return to the investors on a fixed timetable. 

Managers can save crucial time and effort on fundraising with the availability of permanent capital. When other forms of capital become scarce like during a crisis, permanent capital offers flexibility to investments. 

Life Insurance as a Source of Permanent Capital for Private Equity Firms

In recent times, private equity firms have started acquiring or managing life insurance assets. Private equity firms buy out life insurance companies and get access to their assets. They may also take a stake in the life insurance company and acquire the rights to manage all the assets of the company. 

Private equity firms are expanding into retail and assurance markets in this way. By acquiring a stake in the life insurance companies, private equity firms get control over the retirement savings of policyholders. 

These firms can use the insurance assets they have acquired to invest in high-fee alternative investment options. The alternative investments include the private equity firm’s real estate, buyouts, and debt funds. 

It gives the private equity firms a chance to boost the performance of their own weak funds. 

As a routine mechanism, private equity funds launch an investment fund with a fixed tenure, usually ten years, and at the end of the fund tenure, they payout all the capital in the investment fund.

In contrast, private equity funds do not need to worry about fund liquidation and payout at the end of the fund tenure when they raise capital from individual retirement savings. 

How life Insurance Investment Differs From Private Equity Investment

Life insurance policyholders may find themselves in a worrisome situation as private equity firms invest in risky assets. 

Life insurance companies make safe investments and invest in publicly traded stocks and high-grade corporate bonds. These are relatively higher-liquidity investments, and the life insurance company can sell them when it needs cash.

On the other hand, insurance companies owned by private equity firms invest in high-risk assets like debt and equity. 

The rate of interest on these assets is high, but they are not liquid assets. Therefore, if policyholders require sudden cash from their retirement savings accounts, the company may find it difficult to sell off its investments to arrange cash. 

Investors who invested in a life insurance firm to make a plain vanilla investment may find it disturbing to know that a private equity firm has bought their investment. 

Understanding the Trend

The balance sheets of life insurance companies are stocked with assets, making them highly attractive for private equity firms. 

Insurance companies need to put these assets to work, and private equity firms can generate a higher yield using the life insurance company’s funds. 

Life insurance companies have been traditionally participating in private debt funds as limited partners, thus a shift in their capital investment pattern through private equity is not something out of the blue.

Private equity firms can save the cost of fundraising and negotiating with the investors by acquiring the capital held by life insurance firms. They can directly invest the lump sum they get from the life insurance firm’s assets into high-yield investments. 

By partnering with reliable private equity firms, the life insurance company can use the capital it holds to generate higher yields.  

The Final Word

Private equity firms and life insurance companies are getting into a strategic and synergic relationship that is mutually beneficial for both, as well as for the investors. The life insurance policyholders can expect higher returns on their retirement savings and the risk can be mitigated if the private equity firm does quality investments with the policyholders’ capital. 

By Cary Grant

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