TLDR:
– Private equity firms have become a major force in global finance, managing $12 trillion of assets and worth over $500 billion on the US stock market.
– Traditional private equity activities, such as buying and improving companies, have been dull due to high interest rates.
– Private equity firms are now focusing on “private assets” which include infrastructure, property, and insurance companies.
– Insurers are attractive to private equity because of their large balance sheets, which can provide a new source of funding.
– However, investing in insurers brings risks to both the firms and society, as the safety buffers of a firm with illiquid private assets are hard to judge.
– Regulators should cooperate internationally to ensure the adequate safety buffers and enforce transparency and capital standards.
Private equity firms have expanded from a niche corner of finance to a major player in global finance over the past decade. They now manage $12 trillion of assets globally and are worth over $500 billion on the US stock market. Traditional private equity activities, such as buying companies and improving them, have been lackluster due to high interest rates. Instead, private equity firms are focusing on “private assets” which include infrastructure, property, and insurance companies.
Private equity firms, including Apollo, Blackstone, and KKR, have recently been acquiring or taking minority stakes in insurers in exchange for managing their assets. While these investments provide a new source of funding for private equity firms, they also bring risks to both the firms and society at large. Insurers invest over long periods to fund payouts, including annuities sold to pensioners. Traditionally, insurers have invested in government and corporate bonds traded on public markets, but private equity firms can offer higher-yielding private investments. However, the safety buffers of a firm with illiquid private assets are hard to judge, and regulators need to ensure that insurers have adequate capital and transparency standards.
Cooperation among regulators is essential to address the risks associated with private equity’s insurance investments. High standards of transparency and capital need to be enforced by suitably heavyweight bodies. The goal should not be to crush the new business model but to make it safer. Financial innovation often brings new benefits, but regulators need to be proactive in addressing the risks involved.
