Private equity’s field of dreams

One thing to start: Diageo will end its business relationship with Sean Combs, known as Diddy, after the businessman and rapper alleged racial discrimination by the drinks group, which it “categorically denies”.

In today’s newsletter:

• Private equity plays ball for insurers

• How Macquarie put infrastructure on the map

• Private credit comes for banks’ best clients

The private capital feeding frenzy for insurers

In the city of Dyersville, Iowa, about 200 miles from the headquarters of insurer American Equity Investment Life in Des Moines, is a baseball stadium modelled after the 1980s sports classic film Field of Dreams.

“If you build it, they will come,” goes its famous line. The words were meant for mythical sports heroes flocking to a small field in Iowa. But they might as well be applied to AEL and a handful of other once-obscure insurers in the region, which have caught the eye of the world’s largest private equity groups.

On Tuesday, an insurer owned by Brookfield Asset Management announced a $4.3bn takeover offer for AEL that if completed would take private one of the last remaining independent fixed-indexed annuities providers in the United States after firms such as Apollo, KKR, Blackstone all acquired similar outfits.

These insurers have become an engine of growth in the broader private capital ecosystem, facilitating an explosion of increasingly broad lending activities that are allowing private equity groups to become a potent alternative to the banking system.

AEL has $70bn in assets that Brookfield’s insurance outfit Brookfield Reinsurance plans to invest. It also contains a valuable platform of hundreds of annuities salespeople who knock on doors and host steak dinners to drum up new policies for Brookfield to eventually manage.

Brookfield has offered to pay $4.3bn for AEL in cash and some shares in its recently spun off asset management operation.

It could face competition if another private equity firm makes a run at AEL. Earlier this year, an insurer run by Elliott Management abandoned a $4bn takeover effort for the insurer. In 2020, AEL repelled an unsolicited joint bid from Apollo’s Athene unit, which had partnered with MassMutual.

At that time, Brookfield purchased a stake in AEL and entered into a reinsurance pact, which gave the asset manager responsibility for managing billions in AEL customer liabilities.

AEL’s current chief executive Anant Bhalla took the helm in early 2020 and implemented a strategy he called “AEL 2.0” in which the company partnered with alternative asset managers to more aggressively invest the funds of customers.

Brookfield’s deal, however, would end a public dispute that erupted last year when one of its executives resigned from the AEL board and criticised Bhalla, for what it said was a “fundamental change in the strategic direction of AEL”.

The insurer had entered into a multibillion-dollar reinsurance agreement with start-up private capital firm, 26North, founded by the longtime Apollo executive Josh Harris. AEL had also bought a $250mn stake in 26North, which Brookfield suggested was ill-conceived.

AEL fired back at Brookfield, calling it a “direct competitor” that could not remain on the board because in 2022 it acquired a Texas-based life insurer, American National, for $5bn.

But it appears that the sheer size of Brookfield’s offer has been soothing. Bhalla stands to make many millions from the takeover, which Brookfield hopes to sign on Friday.

The only question left is whether Bhalla can dream bigger.

How Macquarie bankrolled a global infrastructure empire

Macquarie wears many hats: a challenger bank, a commodities trading giant, a renewable energy powerhouse, and an M&A adviser.

But in Britain, where governments have been selling off public assets for decades, the Australian bank is perhaps best known for its infrastructure arm.

Globally, Macquarie is an investor in critical assets ranging from gas transmission to broadband to wind farms to water companies. It has been derisively nicknamed the “vampire kangaroo”, with a reputation for buying essential public infrastructure, piling on debt and making handsome payouts to shareholders.

Yet the water industry is where its report card has been marked, the FT’s Gill Plimmer and Nic Fildes report in this deep-dive into the company’s history.

Take Thames Water, which it acquired with co-investors in 2006. 

Investors recovered all their money within six years by borrowing against its assets and paying out dividends. By the time Macquarie sold its final stake in 2017, £2.7bn had been taken out in dividends.

The pension deficit grew from £18mn to £380mn in that period, and debt rose from £3.4bn to £10.8bn, a sum still being paid off with interest by customers long after Macquarie has moved on. Just weeks after Macquarie sold its final stake, Thames Water received a £20mn fine for river pollution.

It’s one of many instances that have led critics and industry insiders alike to wonder whether private capital belongs in state-run monopolies.

Despite being turned into lucrative assets, critics say many of the indebted utilities being scooped up by Macquarie and its rivals are failing to meet their intended purposes.

“Macquarie was one of the first to realise how the steady and predictable cash flows from infrastructure investments could be levered to produce very attractive returns to equity investors,” Peter Folkman, a former council member of the British Private Equity and Venture Capital Association, told the FT.

“But as a public policy, it’s questionable.”

Private credit’s investment-grade push

A few private credit deals have caught DD’s eye as of late — earlier this month, Apollo bought $2bn of AT&T preferred stock, and last week KKR agreed to buy up to €40bn of consumer loans originated by PayPal.

They’re the latest examples of blue-chip companies eschewing banks and bond markets to borrow from the private capital industry’s $1.4tn war chest instead.

A few factors are fuelling this, as DD’s Eric Platt explains. Private credit’s fundraising spree has given managers a lot of cash to lend and the industry’s love affair with investing in or buying insurance companies over the past five years has also added billions of dollars to play with through premiums.

For borrowers, bypassing traditional lenders has its advantages.

Rating agencies typically treat preferred stock deals more favourably than run-of-the-mill loans. And often, because the equity is raised in a special purpose vehicle, such as in the case of the Apollo/AT&T deal, the parent company doesn’t have to report it on its balance sheet.

Other investment-grade deals, such as KKR’s arrangement with PayPal, resemble more traditional asset-backed securities transactions in which assets are bundled together and the interest payments fund new slices of debt that are sold on to investors.

Repackaging loans isn’t new. But unlike regular investment banks, groups such as KKR — which has diversified to include a $200bn credit investment business and its Global Atlantic life insurance affiliate — can do it all in-house, Lex points out.

“We are also a beneficiary of this de-banking of the world because the assets that we need . . . were the kinds of things that used to go on to the balance sheets of banks, investment-grade private credit,” Apollo boss Marc Rowan told investors this month.

Banks are already struggling to compete with the industry that securitises itself, sells to itself, and pays itself dividends.

Intercepting lenders’ biggest borrowers is just another way that private capital is coming for Wall Street’s lunch.

Job moves

• American Express chief financial officer Jeffrey Campbell will retire in August after 25 years at the credit card group. He’ll be replaced by deputy CFO Christophe Le Caillec.

• The Ontario Teachers’ Pension Plan has promoted Bruce Crane to head of the Asia-Pacific region, succeeding Ben Chan, who retired earlier this month.

• Thames Water chief executive Sarah Bentley will step down and be replaced on an interim basis by finance chief Alastair Cochran and strategy director Cathryn Ross.

• HIG Capital has hired Macquarie Asset Management’s John Bruen as a managing director in London.

• Law firm White & Case has elected Heather McDevitt as chair, succeeding Hugh Verrier.

• Deutsche Börse chief Theodor Weimer said he won’t pursue another term when his contract runs out next year, per Reuters.

Smart reads

The waiting game BNP Paribas boss Jean-Laurent Bonnafé can afford the kind of cross-border takeover essential to compete with US rivals. But he’s too aware of the pitfalls of doing such a deal, Bloomberg reports.

Proceed with caution Hong Kong’s regulators want banks to take on crypto exchanges. But that could expose lenders to money-laundering risks, DD’s Kaye Wiggins writes.

The sound of money The Wall Street Journal takes a deep dive into Taylor Swift’s blockbuster tour, which could be the first to gross $1bn in revenue.

News round-up

Odey Asset Management in talks with SW Mitchell over Oliver Kelton’s funds (FT)

Sam Bankman-Fried fails to dismiss criminal charges related to FTX (FT)

US electric vehicle start-up Lordstown Motors files for bankruptcy protection (FT)

Former Fed official teams up with ex-SVB risk officer to launch bank (FT)

Wirecard short seller Fraser Perring sues Jones Day and Kroll (Financial News London)

CAB Payments targets £850mn valuation in rare bright spot for European IPOs (FT)

Some Wall Street interns are raking in $120 an hour this summer (Bloomberg)

Kering/Creed: posh perfume buy embraces luxury gap doctrine (FT)