The private equity barons gambling with your retirement

Telegraph

13-04-2025

Italy is no stranger to financial crises. During the mid-2000s when its economy ground to a halt, some of the country's most prestigious banks were quickly overwhelmed by bad loans.
Tens of billions of euros that had been lent to struggling businesses had to be written off, forcing a string of venerable names to raise emergency capital. Banca Monte dei Paschi di Siena, the world's oldest bank and an institution set up to provide charitable loans to the 'poor or miserable', eventually had to be nationalised.
Yet it is private equity-backed life insurer Eurovita that occupies a particularly unique place among the wreckage. In 2023, the company, at the time under the control of UK-based private equity house Cinven, became the first ever Italian insurer to crash into administration.
The authorities quickly assembled an industry-led rescue deal involving five rival insurers and 25 banks that protected the payouts of thousands of policyholders and around €10bn (£8.7bn) of assets. Cinven declined to comment.
Two years later and the shadow of that dark day still looms large over a sector that has become rich pickings for private equity bosses on the hunt for untapped pools of capital to fund their empire building.
Concerns are mounting over whether aggressive, profit-hungry private equity financiers are suitable custodians of organisations that typically invest over many decades.
Life insurers sell annuities – a type of insurance policy that provides a guaranteed income stream, typically for retirees – and invest the premiums collected from customers in order to make a return beyond what they pay out to policyholders.
Some critics are now asking whether the risk-taking private equity barons that have piled into a sector renowned for its conservative approach, are effectively gambling with the retirement savings of millions of unsuspecting people.
Regulators meanwhile have warned that this gigantic bet could trigger a credit crunch with potentially grave consequences for the financial system.
The industry rejects such concerns. 'Private equity firms are long-term investors, with a view to creating value for all stakeholders involved. These firms are highly regulated in the UK by the FCA and subject to various frameworks,' a spokesman for the British Venture Capital Association says.
However, economist Eileen Appelbaum, of the Centre for Economic and Policy Research in Washington, claims that the private equity industry's track record as owners of businesses, as well as their poor fund performance raises serious questions about whether they can be trusted to protect the retirement savings of millions.
She points to a study conducted by the California Polytechnic State University in 2019. Researchers found that one in five private equity-owned companies bought with debt financing go bust within 10 years of being bought – a rate 10 times higher than that of publicly owned companies.
Nevertheless, the buyout industry 'has been trying to get its hands on retirement savings for years', Appelbaum, a longstanding critic of private equity, says.
It was the era of ultra-low interest rates that ultimately opened the floodgates. Insurers were 'plagued by policies' written before the crash when interest rates and the stock market looked very different, a recent report from consultancy giant McKinsey found. As life insurers struggled to keep pace with what the IMF calls 'guaranteed rates of return on their products', many owners wanted to get out.
Private equity bosses have rushed to fill the gap with a promise of boosting profits and ultimately returns for customers, while charging fees for managing the assets. In 2020, KKR bought a majority stake in the insurer Global Atlantic, a move that the firm estimated would boost fee income by $200m (£153m).
Over the last decade, the industry has hoovered up more than $900bn of insurance liabilities across the globe, according to McKinsey.
The land grab leaves 13pc of the US insurance market in the hands of an industry that is notoriously secretive and willing to take greater risks with investors' money – up from just 1pc in 2012, its study showed.
City bankers say the suppressed share prices of UK insurers has left them in the cross-hairs of deal-hungry private equity firms. 'All the ingredients are there,' one says.
The world's financial police have been queueing round the block to express their growing disquiet at the foray. A series of industry mini-crises such as allegations of fraud running into the hundreds of millions of dollars at Miami-based private equity firm 777 Partners have added to the unease. 777 has said it 'vehemently refutes' the claims.
The firm has been on an investment spree in sports teams and airlines across the world, backed by a reinsurance business it owned in Bermuda. It tried but failed to buy Premier League football team Everton.
A chief concern of regulators is that in the hands of hard-charging private equity executives hunting higher returns, unsuspecting policyholders are exposed to riskier assets.
European insurers were sitting on almost €1.4 trillion of so-called alternative assets as of June last year, the IAIS cautioned in a new consultation paper published earlier this month.
Where historically life insurers would invest overwhelmingly in traditional assets such as stocks, bonds, and cash, in the hands of private equity, portfolios are tilted towards more opaque private investments that are trickier to value and to trade.
Reinsurance giant Swiss Re estimates that European insurers' allocations to 'illiquid and potentially risky assets' almost doubled from 8pc in 2017 to about 15pc in 2023.
The Bank of England points out that this has happened at the same time as private equity's control of life insurance assets has jumped by more than $1 trillion from very low levels since the end of the global banking meltdown in 2009.
Figures from the National Association of Insurance Commissioners in the US, show that nearly a third of all the bond investments held by private equity-owned life insurers at the end of 2023 were in asset-backed securities compared with just 12pc for all other life insurers.
These can be anything from car loans and credit card debt to plane leases and restaurant franchise fees that have been packaged together into one investment.
Firms with a higher proportion of more illiquid assets are 'more vulnerable' to a credit downturn, the IMF warned in its 2023 stability report. This could be 'aggravated' by the inherent volatility found in more speculative investments, it said.
Bank of England officials are concerned about the potential for 'asset fire sales' if these investments suddenly tumble in value, sparking panic among policyholders. Such an event could disrupt the functioning of financial markets, the Bank has warned.
As the proportion of riskier investments gets bigger, the likelihood of bankruptcy also increases, according to a Bank of France study.
Policymakers are also nervous about the growing inter-connectedness between life insurers and their private equity owners. Faced with what the IMF has called a 'growing reluctance' among traditional banks to fund big debt-fuelled private equity deals, buyout firms have swept into the private credit arena to become lenders in their own right.
Much of the capital for this push has come from life insurance annuities, and increasingly, the same pool of money is even being used to support other companies under the same private equity firm's control.
KKR's $190bn insurance behemoth Global Atlantic has helped arrange billions of dollars in financing for companies it owns including Cyrus One, a Dallas-based data centre operator it bought for $11.5bn in 2021.
The Bank for International Settlements has warned about the potential for 'additional risks' from 'conflicts of interests ... where asset managers, including private equity firms, have an incentive to allocate insurers' funds to assets they originate'.
At Eldridge Industries, the investment firm of Chelsea FC owner Todd Boehly, a quarter – $12bn – of the invested assets held by its insurance arm Security Benefit are reportedly loans made to other Eldridge affiliates. Eldridge responded to The Telegraph's questions via lawyers and declined to comment.
Boehly, whose fortune is estimated at between $7bn and $8bn, has been at the vanguard of the private equity-insurance tie-up model. The American investor founded Eldridge in 2015 with a handful of companies, including Security Benefit, he had bought from his employer, the investment bank Guggenheim Partners.
Today, it is a sprawling collection of more than 100 businesses ranging from the LA Dodgers baseball team and Cirque Du Soleil to the bakery chain Le Pain Quotidien and grocery delivery start-up Gopuff. In 2021, it financed Sony's purchase of the publishing rights to Bruce Springsteen's back catalogue.
The Bank of England is concerned that the use of insurance liabilities to fund 'lending activities' could pose 'systemic risks'.
At Apollo, one of the world's biggest private equity managers, insurance arm Athene Holding has become so large that it dwarfs the rest of the firm put together. In 2021, the pair unveiled a full-blown merger that created a financial conglomerate worth $30bn. Athene now accounts for just under half Apollo's $750bn of assets under management and about two-thirds of its earnings.
In most cases, policyholders will be unaware that their insurance provider is taking increasingly risky bets, pensions consultant Chris Tobe thinks.
'They have no idea of what the insurance company does with their money and many of the people who sell these investments don't know either. They just care about whatever commission they make.'
Appelbaum fears regulation is too lax and too disparate. Federal banking regulations require US banks to hold high amounts of capital. Insurers are monitored by 50 different state regulators, and aren't subject to the same capital requirements. Insurers with riskier investments should be required to hold higher reserves, she said.
Questions are also being asked about the growing use of reinsurance deals, which offload assets often offshore, making them harder to monitor, and liquidate if there is a burst of customer redemptions.
But the biggest problem of all with private equity's life insurance grab, according to Appelbaum, is that it is partly based on something of an illusion.
With much of its firepower coming from pension funds and university endowments, the private equity industry has tried to entice would-be investors with the promise of 'extra high returns that are only available to pension funds and endowments,' she said.
However, a recent study by the data provider Pitchbook, shows the reality is a long way from matching the hype.
The 50 largest university endowments, which have a combined $800bn tied up in private equity assets, posted an annual return of 8.3pc over the last decade, its tracker found.
Meanwhile, a plain vanilla 60-40 (60pc stocks, 40pc bonds) Vanguard mutual fund returned 8.38pc over the same period.
'Let that sink in. Endowment funds got no extra payoff for investing in private equity funds or other private assets,' Appelbaum wrote in a recent blog post.
'They could have made the same return by joining with millions of ordinary people and investing in a plain vanilla mutual fund.'