Carlyle plants flag in insurance market

The Carlyle Group is the latest multi-strategy alternative asset manager to make a move into the insurance sector.

The firm has agreed to acquire 19.9 percent of DSA Reinsurance from American International Group and will enter into a strategic partnership with AIG to build DSA Re into a standalone reinsurance provider, according to a statement.

As part of the transaction DSA Re and AIG will commit $6 billion of assets into a variety of Carlyle investment strategies over a 30-month period.

On Carlyle’s second quarter earnings call on Wednesday, co-chief executive Kewsong Lee said the firm anticipates 40 percent of the $6 billion will be committed to global credit, with the remainder split between private equity, real estate and natural resources.

The firm will fund the acquisition using its balance sheet with an upfront cash payment of $381 million to AIG and a further $95 million to be paid in five years’ time. The investment is expected to close in the fourth quarter.

Lee identified three streams of revenue for Carlyle from the transaction: $50 million of annual management fee revenue after the full $6 billion is invested; performance fees; and a return on the 19.9 percent equity investment through growth in franchise value and as dividends are declared by DSA Re.

“This investment better-positions DSA Re and Carlyle to serve other insurance companies, which just like AIG, haver large pools of long-term liabilities for which they need help to generate reinsurance solutions and attractive investment returns,” Lee said.

“We see this sector broadly as an interesting source of future growth.”

Last year fellow listed alternative assets giant Blackstone acquired annuity provider Fidelity & Guaranty Life in an all-cash transaction in which FGL entered into an investment management agreement with affiliates of Blackstone. In 2009 Apollo Global Management created annuity company Athene, retaining a significant stake when the insurance company went public in 2016.

Carlyle’s assets under management reached just shy of $210 billion in the second quarter, up 24 percent over the last 12 months. This includes $81 billion for corporate private equity. The firm raised $8.8 billion in the quarter for private equity, and $32.8 billion in the last 12 months.

It invested $1.6 billion into new and follow-on private equity investments and announced a further $4.3 billion of investments which are expected to close over the next few quarters. Its carry funds appreciated 3 percent in the quarter, compared with 8 percent for the second quarter of 2017.

“The environment for new investments remains challenging, with high prices and heavy competition in most every asset class. We have deep experienced investment teams around the world hustling hard every day to find the right opportunities,” co-chief executive Glenn Youngkin said on the call.

“While anything but easy, we do remain confident we can deploy our $81 billion of available capital into investments that meet our risk and return hurdles.”

Youngkin added that “we do expect near-term investment activity to be somewhat lower than our recent trend”.

Carlyle raised $12.3 billion across strategies in the second quarter, and almost $52 billion in the last 12 months, putting it on target to reach 87 percent of its three-year $100 billion fundraising goal by the end of this year.

“Even though we had fairly high expectations for 2018, we are raising more capital at a faster pace than originally anticipated,” Youngkin said, adding Carlyle expects to raise about $30 billion for the year, up from its previous estimate of $25 billion.

In late July Carlyle announced it had held the final close on its seventh flagship buyout fund on its $18.5 billion hard-cap. Carlyle Partners VII, which had a $15 billion target, attracted more than 320 limited partners from 57 countries. The firm, along with its senior professionals, operating executives and other professionals, committed $1 billion to the vehicle.

Thus far the firm has raised $4.8 billion for its fifth Europe fund, which is in market. Carlyle is also looking to launch its second long-dated private equity fund, Carlyle Global Partners II, “imminently”.

The interactive chart below shows the firm’s private equity fund history, based on its updated results released today. Toggle between the tabs to see how the funds have fared by internal rate of return and multiple of invested capital. The bubbles are sized proportionately to the size of the fund; hover over them to see fund data.