Preqin currently tracks 330 insurance companies actively investing in private equity, with combined total assets under management of over $4tn. The top 20 insurance companies have an aggregate current allocation to private equity of more than $65bn. These top 20 insurance companies have, on average, a 4% current allocation to private equity, which is below the average target allocation of 4.5% of total assets.
Eleven of the top 20 insurance companies are based in North America, with six located in Western Europe and a further three based in the Nordic region. With such a high regional concentration, it will be interesting to observe the impact that new regulations such as Solvency II in Europe and the Dodd Frank Act in the United States will have on insurance companies’ investment decisions once these regulations are fully enacted. Preqin’s Special Report: Insurance Companies Investing in Private Equity indicates that the effect of such regulations will be marginal, with 79% of insurance companies maintaining their exposure to private equity, whilst a further 2% have increased their exposure more recently.
Buyout funds are the most popular fund type among the top 20 insurance companies, with each company expressing a preference for the fund type. Venture capital and growth funds were the next most attractive type, with 90% of the top 20 expressing a preference for each fund type, followed by mezzanine funds at 75%. Distressed debt vehicles were stated as a preference by 65% of the top 20 insurance companies.
It is apparent that insurance companies within the top 20 are much more likely to commit to a first-time fund than other insurance companies currently investing in private equity. Half of the companies in the top 20 will either commit to a first-time fund or will consider doing so if an exceptional opportunity arises, compared to 28% of all insurance companies. Conversely, 33% of the top 20 insurance companies would not consider committing to a first-time fund, compared to 54% of all insurance companies. The proportion of insurance companies in each group that would commit to a first-time fund managed by a spin-off team is more similar, with 17% of the top 20 favouring spin-off teams compared to 18% of all insurance companies currently investing in private equity.
It may be the case that insurance companies within the top 20 are more confident in their ability to accurately choose first-time fund managers which will go on to become successful, whereas insurance companies who invest a smaller amount of capital are more cautious with their investments. Indeed, the size of these insurance companies’ private equity portfolio may also influence the decision; insurance companies with larger portfolios may feel that commitments to first-time fund managers represent a small enough proportion of their overall portfolio that the risks of doing so are minimized. Firms with smaller, less diversified portfolios may feel it is safer to invest with managers who have a proven track record.
Overall, insurance companies are significant contributors to the private equity asset class, investing large amounts of capital across the full range of fund types and geographies. It is likely that this importance will continue in to the future as, despite the increasing amount of legislation surrounding their involvement in the asset class, private equity still remains an attractive investment option for this type of investor.