Patrick Jenkins has written a great opinion piece, inspired it seems by the acquisition of one insurance company (PIC) by a private equity company Athora. He is also struck by Legal & General, who last week struck a deal with Blackstone to allocate as much as $20bn of its annuity funds to private credit. He kicks off his thoughtful article by examining rep pension scheme Enasarco, which was revealed last week to have allocated 67 per cent of its entire European equities portfolio to one stock, Mediobanca.
The Italian pension system is clearly open to skulduggery and Jenkins holds it out as what Britain’s isn’t and shouldn’t be. But when the “masters of the universe” use private credit and private equity to buy up our savings and buy out the insurers to do more, then we should like Jenkins , be wary.
Jenkins is right to point out how the phrases “productive investment” from “productive capital” are reflecting the genius of the private markets sector in sequestering the label and then engendering echoes of approval from policymakers on both sides of the Atlantic.
I should be careful here as I have worked closely with Edi Truell , the founder of PIC and a master of deals over the years. I know where to draw the line with Edi, if I cannot understand what is going on , I won’t endorse it and that is what trustees must do. The genius of investors in private markets is to open the door for others to walk through open eyed. This is what those who know Warren Buffet say of him.
I think it critical that we know the deals when we are a party to them, whether as savers, regulators, fiduciaries and shareholders of companies committing futures to financiers who know a little more than they are prepared to tell you (intellectual property can easily be an excuse for non-disclosure which is usually the first step towards fraud). We are another financial generation from those who had to go through 2008-9, but Jenkins (and I) have not forgotten.
Of Athora, PIC’s new owner, Jenkins writes
Athora is 25 per cent owned by Apollo — both directly and via the private capital giant’s US insurance subsidiary Athene. But even if that line is largely dotted, Apollo’s influence is clear. It controls five out of 11 board seats (though it points out it has a board-level “conflicts committee” chaired by an independent director). And it has followed a clear modus operandi for the European pension schemes it spent the past few years hoovering up.
“Following new acquisitions,” Athora says in its annual report, “we invest and rotate the acquired asset portfolio towards our target Strategic Asset Allocation”. That means ensuring there is a “greater proportion of return seeking assets . . . which are primarily high-quality private credit assets”.
He points out that regulators, fiduciaries and investors have a job to do sorting the good from bad..
But there are snags. One is that, unlike their publicly traded counterparts, private capital investments are not valued transparently or, in some cases, accurately. In March, the UK’s Financial Conduct Authority, which supervises asset managers, published a detailed study on private capital valuation practices. It found substantial causes for concern. It urged firms to manage conflicts of interest more effectively and ensure that they conduct independent valuations, underpinned by proper governance and documentation systems.
One of Patrick’s colleagues reports concern in the US over just such issues. The sub-headline will probably catch more attention from wary Brits.
Jenkins’ experience and reputation allow him to get this opinion into the FT. We trust the FT as we respect Jenkins. He concludes
The potential conflicts are all the more acute at insurance companies that are themselves controlled by private capital businesses — either wholly as has become a trend in the US, or partly as in Europe, where regulators appear more hesitant about full-fat alliances.
Twenty years ago, “masters-of-the-universe” bankers were generally seen as the smartest people in finance. But bank shareholders and taxpayers alike learned in 2008 that they had stacked the stakeholder odds in their own favour. Today as the best brains gravitate towards asset management and private capital in particular, it is pensioners who should perhaps be wary.
We should not avoid the financiers who bring us private assets financed by private capital. But we should recognise that we need new skills to ensure we are proper purchasers of their wares. Wares to be wary of?
