Insurers boost allocation to private equity

Insurers are increasing their investment in private equity as they look for higher yielding assets to make up for poor returns on their government bond portfolios.

Firms including Ageas, Zurich, CNP Assurance and Skandia are seeking to increase or have recently increased allocations to private equity.

Jonas Nyquist, head of buyouts at Skandia in Stockholm, says: "Up until 2007, invested capital in private equity was around 1.5% of our balance sheet. Then it was decided we would increase our allocation to 10% over a five-year period. Now we're around 7.5% invested, a little below target, although 10% is still our aim."

Skandia targets a yield on its private equity portfolio equal to the MSCI World index plus 300 basis points, Nyquist adds.

The long-term nature of private equity investments, typically held for between eight and 15 years, their function as a diversifier, and their enhanced yield compared to listed equities, makes them a good match for insurers' liabilities.

A recent survey by asset management giant Blackrock revealed that 54% out of 206 firms surveyed are either moderately or very likely to increase investment in private equity, with 70% confident of their ability to assess the risks inherent in this asset class.

Brokers argue that interest in private equity has risen in response to the lack of returns-generating opportunities present in traditional markets.

Kishore Kansal, head of private equity risk solutions at inter-dealer broker Tullett Prebon in London, says: "There's certainly recognition that insurance investors need an allocation to private equity, as well as other alternatives, in order to meet liabilities.

"But what we are also seeing is where there are certain firms more subject to regulatory pressures; those groups are actually deciding to go out and sell their interests."

This seems especially true for very large groups, including those recently labelled global systemically important insurers by the International Association of Insurance Supervisors.

In July, Italian group Generali offloaded a €500m private equity portfolio to Lexington Partners. Last month, Axa disposed of its private equity unit (although it retained a 21% state in the spun-off entity).

Excepting these large transactions, however, the trend seems to be for insurers to increase allocations.

Some insurers are also looking to refine their approach to private equity to boost their chances of increased yield, instead of simply allocating a set amount to the asset class spread across a whole range of funds.

For example, Ageas is focusing on mature funds so as to keep the level of risk below a certain threshold, and is also investing in infrastructure equity, which offers higher returns tied to a physical underlying asset.

It is not only investment alpha that recommends private equity to insurers. They are also attracted by the illiquid nature of the assets, which help to stabilise balance sheet earnings.

Wim Vermeir, chief investment officer at Ageas in Brussels, explains: "It's not an instrument you can mark-to-market, so in terms of balance sheet volatility you don't have the same kind of swings as with assets listed on exchanges."

This article was originally published on unquote's sister title Risk.net.

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