A perfect match: Alternative firms join with insurers

Apollo Global Management Inc.'s recent announcement that it would merge with insurance company Athene Holdings Ltd. is just the latest example in a flurry of the mergers, acquisitions and strategic relationships struck between alternative investment firms and insurance companies.

Money managers say the moves produce a perfect match, adding a big influx of permanent capital to their assets under management. The combinations also provide new, major clients that are part of an estimated $23 trillion insurance industry, helping managers to diversify their limited partner base and, in some cases, seed new funds as well as existing strategies.

Marc Rowan, New York-based co-founder and senior managing director at Apollo, said during an investor call after the deal was announced that the merger will enhance the $455.5 billion manager's ability to generate excess returns across the risk-reward spectrum — "something that is very difficult to find in today's marketplace" for all of its investors, not just Athene.

And for insurers, they get access to private assets that carry the promise of higher returns.

There is "truly a structural change in the industry between insurance players and asset managers" that has been evolving over the last three years, said Elena Lieskovska, partner and head of insurance worldwide for private equity firm Varde Partners LP.

While these combinations can provide existing limited partners with access to new investment strategies, they can also raise conflict-of-interest issues, industry insiders say.

In addition to Apollo's $11 billion deal with Athene, announced March 8, to buy the roughly 65% of the insurance company it did not already own, other big 2021 developments include:

• Blackstone Group Inc. announced it would buy Allstate Corp.'s life insurance business for $2.8 billion.
• KKR & Co. closed its $4.7 billion acquisition of Global Atlantic Financial Group Ltd.
• Adams Street Partners LLC announced a $2 billion strategic partnership with American Equity Investment Life Insurance.
• Aflac Global Investments, the asset management subsidiary of insurer Aflac Inc., partnered with alternative investment firm Sound Point Capital Management LP to form a new real estate credit manager, committing an initial $1.5 billion to the new business.
• Sun Life Financial Inc. completed its acquisition of a 51% stake in credit manager Crescent Capital Group LP, adding to its money management business, Sun Life Capital Management.

"There are definitely different approaches to the opportunity and you will see the spectrum of different collaborations, partnerships, acquisitions," Ms. Lieskovska said.

Apollo formed Athene in 2009, helped take it public in 2016 and eventually boosted its stake to about 30% by purchasing Athene shares. Athene currently makes up 40% of Apollo's AUM.

Successes of early investors such as Apollo are encouraging other alternative firms to partner with insurance companies, which is increasing competition, she said.

Given the size of the insurance industry, "there should be opportunity for all the players to express themselves in their own way," Ms. Lieskovska said.

Alternative investment firms are looking for new capital sources, in part, because defined benefit plans — which have been the lifeblood in the development and growth of private equity — are not growing, said Ted J. Gooden, New York-based partner and head of private markets at Berkshire Global Advisors, a mergers and acquisitions adviser in the investment management industry.

In a prolonged low-interest-rate environment, insurance companies also need to diversify their portfolios beyond their traditional heavy reliance on bonds, mortgages and other public securities that had provided sufficient returns in the past, he said.

"The two industries are on a crash course," as insurance companies continue to move into alternative investments, Mr. Gooden said.

"For a long time insurance companies were overweight safe investments, and even though they generated a lot of cash, they are falling behind relative to private equity firms, which have surpassed them in value," leading to mergers and acquisitions, he said.

Combining with an alternative investment firm also gives the insurance company a "real window" into how their portfolio is managed, giving them more insight than a typical limited partner would receive, he said. The relationship also ensures that the alternative investment manager "is completely vested in their interest," Mr. Gooden said.

"There are more (mergers and acquisitions) conversations going on now and in the past year than in history," Mr. Gooden said.

What's more, other alternative investment managers noted Apollo's successful relationship with Athene, he said. "The private markets business, to some degree, looks for innovation from others and has a tendency to mimic, build on or copy successful strategies," Mr. Gooden said.

There are more deals now because it is more accepted for the two industries to come together, he added.

Other limited partners get access to investment returns and new strategies, but they also have to deal with possible conflict-of interest-issues, said Michael Siegel, a managing director and global head of insurance asset management and liquidity solutions businesses at Goldman Sachs Asset Management based in New York. In some of the recent deals, alternative investment firms have used their own money rather than limited partner capital for the insurance company transactions, he noted.

"This tells me, in part, they want to avoid the perception and reality of conflict," Mr. Siegel said.

Conflicts can arise regarding funds and questions of whether the in-house insurance company will get the first shot at desired funds or be allowed to commit more than other limited partners, he said. A question also arises with co-investments and whether the manager's insurance company will be offered a particular co-investment opportunity before other LPs.

Conflicts of interest can also arise if the alternative investment firm invests in the insurance company with capital from one of its investment funds, Mr. Siegel said. In that case, the alternative investment manager has a vested interest in the success of one of the investments in the fund rather than all of the investments in the fund, he explained.

Most managers take steps to prevent such conflicts, he said.

"The larger asset managers we know well have very robust compliance, oversight and very robust allocation rules," he said.

However, alternative investment managers have not always used their own money to create these insurance company strategic relationships. Apollo created Athene with $2.5 billion from its other limited partners and strategic accounts, Apollo's Mr. Rowan said during the investor call.

Those investments have been fully exited with limited partners and strategic accounts earning approximately two-to-four times their investment, Mr. Rowan said.

Bill Sacher, New York-based partner and head of credit at alternative investment fund-of-funds and direct investment manager Adams Street Partners, said there is nothing about its narrow arrangement with insurance company American Equity Investment Life that is inherently conflicted.

The narrow focus on private credit avoids any potential conflicts of interests, he said. Adams Street will originate loans for middle-market companies through its private credit business with American Equity committing up to $2 billion to the investment strategy.

"We think that the scale of the opportunity set is immense," Mr. Sacher said.

Adams Street's strategic partnership is a reflection of the broader phenomenon in the market. The new relationships fill a need in insurance companies' general accounts to find assets that matches their liabilities, Mr. Sacher said.

"Over time, alternative credit products have become more important," he said.

Alternative investment firms like Adams Street get more assets to manage, which in many instances enhances the manager's ability to originate loans. "More scale makes us more competitive in the market," Mr. Sacher said.

Last year, American Equity Investment Life Insurance also approached private equity shop Pretium Partners LLC to create a strategic partnership, which Ted Huffman, Pretium's New York-based senior managing director and chief strategy officer, said includes American Equity taking a stake in the money manager .

The deal includes AEL increasing its prior commitments with Pretium to $2.25 billion, from $1 billion, to invest in residential credit assets sourced and managed by Pretium.

There is a huge opportunity set to access real estate loans rather than real estate securities such as residential mortgage-backed securities and commercial mortgage-backed securities, which is how many insurance companies invested in real estate debt in the past, Mr. Huffman said. Competition for real estate debt securities and other fixed income has caused insurers to partner with alternative investment managers to get access to the loans underlying these securities.

The size of the market opportunity for insurance companies seeking to allocate to real estate assets is between $1.5 trillion and $2 trillion, according to Pretium's estimates based on data from S&P Global Market Intelligence.