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The Sage of New York

8 Jul 2020 By Lauren Silva Laughlin

Henry Kravis has always had a thing for Warren Buffett. In 2002, according to Bloomberg, the Sage of Omaha one-upped the co-founder of KKR in a deal for some Oklahoma energy assets. After years trying to bulk up his so-called permanent capital – the type investors can’t just decide to walk off with – Kravis’s $26 billion firm is mimicking Buffett’s $440 billion Berkshire Hathaway investment vehicle by buying an insurance company, Global Atlantic Financial. Between the price and the overall strategy, the deal looks smart.

Kravis’s private equity firm, not its funds, will buy Global Atlantic for book value at the time of close, a measure that stood at $4.4 billion at the end of March. Because Global Atlantic has to invest the insurance premiums it receives, the acquisition will increase KKR’s total assets under management by more than a third to $279 billion.

Importantly, Wednesday’s deal also boosts the company’s permanent capital as a percentage of AUM from 9% to 33%. For an insurance company that consistently takes in more premiums than it pays out in claims, the extra capital or “float” can cost less than nothing, one reason Buffett loves it.

Compared to another insurance deal announced on Tuesday afternoon, Kravis looks disciplined, too. KKR will pay book value, while Allstate will pay a 78% premium to book value to buy peer National General, also for roughly $4 billion. The two targets’ businesses are different, of course. But between the price and the overall reach for Allstate – it gets the company deeper into a business already in the midst of disruption from online vendors – shareholders aren’t pleased. Allstate’s stock traded down almost 3% on Wednesday morning, while KKR’s shares surged over 7%.

Like Buffett with Berkshire Hathaway, KKR can bring something insurance companies need: investing acumen. KKR will also be spared some of its past effort knocking on doors for money. It’s a handy move from the Sage’s playbook.

 

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