Paul Junck, managing director of LPEA, "The private equity industry is not as risky as it may seem."
An article published recently on Bloomberg caught Delano’s eye. With the headline, “Private equity eyes European insurers betting on returns boost,” we were at once curious and a little alarmed. Are PE firms looking to take over insurance? How can two seemingly very different investment approaches even work together?
Insurance is viewed as a long-term, low risk contract and PE the very opposite, often seen as risky and a means to turn a quick profit. In order to better understand we talked to Paul Junck, managing director of the Luxembourg Private Equity Association who provided some context.
Margaret Ferns: Have you seen any evidence of this in Luxembourg? If so, how much?
Paul Junck: Although we have no details from general partners in Luxembourg as to how they are fund raising, globally it has indeed been growing. Today, insurance firms represent roughly 7% of private equity investors. The allocation of insurance firms to private equity has increased from 9% to 10% in the past 5 years. Only pension funds (public 30%, private 15%) and sovereign wealth funds (19%) are allocating more of their funds to PE today. In the long term 39% of all investors are planning to increase allocation to private equity (only 5% plan to decrease). (Source: Prequin Alternative Assets Performance Monitor 2017.)
MF: Is PE getting involved in insurance a good thing, given that it tends to be risky and insurance more of a long-term commitment?
PJ: The private equity industry is not as risky as it may seem. Pension funds, which are as conservative as insurance firms, report median net returns in their private equity allocations in the past 10 years ranging between 7.5% and 11.5%. This is well above the returns they obtained in the same period for fixed income, listed equity, hedge funds and even real estate (source: Prequin Alternative Assets Performance Monitor 2017). Private equity is also a long-term commitment. Any investor committing to invest in private equity knows the fund will run for 8-10 years or even longer.
MF: Are insurers in Luxembourg beginning to change their investment strategies to consider alternatives like PE and real estate?
PJ: We definitely hope so. Luxembourg doesn’t have many institutional investors and we believe local insurers can increase their exposure to this space. While there are no public commitments, they do participate in our events and are therefore in their learning process. Family offices and private banking are also coming more and more into PE, both globally and in Luxembourg.