Private equity underwriters (PEU) charge fees on committed capital, not just on the amount they've invested. It's a business founded on leverage, political connections and preferred taxation.
Over the last twenty years private equity exploded as an asset class. They bought and sold thousands of companies. PEU founders grew so influential the media called them "policy making billionaires."
Several years ago private equity firms began buying insurance companies and steering those pools of capital to their PEU offerings. This was framed as smart capitalism vs. a conflict of interest.
Carlyle has raised $2.1 billion in equity capital for Fortitude Re from existing investors. Carlyle will provide Fortitude Re with M&A, transaction origination and execution, and capital management services, as well as source new growth opportunities.
Fortitude Re will have substantial financial flexibility arising from adjusted equity capital of more than $6 billion inclusive of this capital raise. Including the previously announced acquisition of Prudential Annuities Life Assurance Corporation
Rising interest rates imperiled the value of PEU affiliates. Higher rates raised the specter of future bankruptcies should those affiliates not be able to refinance their debt when it came due, either to it being prohibitively expensive or not available at all. Wiping out all that private equity got the wheels turning.
What if the PEU boys could package, sell and earn fees on large debt pools, using fund funds to refinance affiliate debt (the ones worth saving)? It'd be only a few years at higher rates, if Fed Chair and former PEU Jay Powell can knock inflation and rates back down.
Public pension funds are investing an increasing amount of their capital into private equity offerings, rolling the dice for greater returns. PEUs have engaged in shady behavior trying to get public pension commitments for their fund offerings.
The greed and leverage boys are extremely interested in pension and insurance capital pools. Two moves by IBM in the pension arena may end up helping PEUs. The first happened last year:
International Business Machines, Armonk, N.Y., purchased group annuity contracts from Prudential and Metropolitan Life Insurance to transfer a total of $16 billion in U.S. pension plan liabilities. The purchases, which closed Sept. 13, transferred the benefit-paying responsibility for about 100,000 retirees and beneficiaries covered by the IBM Personal Pension Plan.The other happened last week:
"Starting Jan. 1, 2024, IBM is introducing a new company-provided benefit for U.S. employees called the Retirement Benefit Account," company spokesman Tim Davidson confirmed to us in an email. "The RBA will replace current company contributions to the IBM 401(k) Plan."
IBM under the new plan will still be making contributions to employees' retirement accounts--but it will be forcing them to lend the money back to the company, on terms usually reserved for the U.S. government.
The move enables IBM to turn debt payments into pension funding, killing two financial birds with one stone and places responsibility for any failure onto the Pension Benefit Guarantee Corporation, i.e. taxpayers.
"This move will save IBM lots of money," Prince tells me. "IBM won't have to make 401(k) contributions anymore." Those contributions cost the company $489 million last year
I'm sure this excited the PEU boys and they trained their AI models on doing something similar across their affiliates.
There's nothing better than free money backed by the full faith and credit of the government. Earning fees on that while keeping overvalued assets from imploding.... it's the PEU way.
To sum up, the new PEU greed cycle is packaging debt, selling it and earning fees. It's also creating and leveraging new capital pools. Dive in, the water's fine.
Update: Semafor recently had articles on 777 Partners and their recent PEU buying spree.
Update 11-30-23: The Department of Justice is investigating 777 Partners use of captive insurance company capital. Semafor characterized 777 Partners as:
....the little-known firm that’s been investing insurance cash into sports teams and other edgy deals.
...much of 777’s money comes from various insurance operations, much of it bankrolled by a U.S. insurer whose CEO held significant sway over its operations and, on at least one occasion, received a personal loan from the firm.
As for investing in private credit Porter Collins said to avoid them at all costs.
Update 12-10-23: The Carlyle Group may play in the pension dump to insurers trend. Those are big capital pools.
Update 12-14-23: Seeking Alpha reported:
U.S. private equity firms KKR (NYSE:KKR), Apollo Global Management (NYSE:APO) and Carlyle Group (NASDAQ:CG) are considering separate bids for U.K.-based Pension Insurance Corp. in the runup to a deadline this week, according to a Thursday media report.
Another capital pool and likely another conflict of interest.
