KKR (Kohlberg Kravis Roberts) take 25% stake in Nephila Capital

If you wanted evidence to demonstrate just how popular the insurance-linked investment universe is currently, the news which broke late yesterday that the largest investment manager in the ILS sector, Nephila Capital, is selling 24.9% of its business to private equity and buyout giant KKR & Co. L.P. (or Kohlberg Kravis Roberts), should really bring it home. Nephila also announced that it is shuttering two of its investment funds due to market conditions.

KKR have clearly seen the attractive returns which are available from investments in catastrophe risk insurance and reinsurance business and have decided to make it a key part of its strategy at this time. The firm is known for acquiring stakes in businesses where it sees a reasonable chance to grow the business in size and usually offloads its acquisitions for a profit at a later date. However in this case the holding company is making the purchase, not a KKR fund, so the strategic investment it is making shows KKR sees a longer-term opportunity with Nephila.

This deal sees KKR acquire a 24.9% interest in Nephila Capital, by acquiring shares directly from Nephila management and from Nephila’s other minority stakeholding investment house Man Group plc. Man Group will retain an 18.75% interest in the business.

Nephila has been in the market since 1998, when Frank Majors and Greg Hagood ran the operation as a unit of broker Willis Group, which was at the time a KKR company. Majors and Hagood then took Nephila private and have grown the business substantially since then to an estimated $8 billion assets under management today.

Nephila has become the largest example of a specialist investment manager, managing clients assets and investing them in instruments linked to insurance and reinsurance risks. Nephila invests in catastrophe bonds, insurance-linked securities, weather derivatives, instruments such as industry loss warranties (ILWs) and private reinsurance transactions. Through these strategies Nephila allows its client investors to access the returns of the reinsurance market and it appears KKR want to get in on the action.

Henry Kravis and George Roberts, Co-Chairmen and Co-CEOs of KKR, said: “In backing Nephila, we are partnering with a team we have known for more than 15 years, dating back to our investment in Willis Group. As the first dedicated manager of catastrophe risk investment strategies, they share the entrepreneurial spirit that pervades KKR’s culture and, with an excellent 14 year track record, we think they are the best team in the industry.”

Nephila’s management committee stated: “Having access to KKR’s global network of relationships, infrastructure and management expertise will open up new doors for Nephila and our investors. We’re confident that our new partnership will strengthen relationships with our insurance counterparties and introduce new sources of investment opportunity, particularly with state governments that are exploring new ways to transfer catastrophe exposures.”

It’s estimated that Nephila Capital have as much as $8 billion of assets under management, making them the largest dedicated reinsurance-linked and ILS investment manager in the sector. They are also known for innovation having been one of the driving forces behind the adoption of the CWIL or County Weighted Industry Loss product which has become so popular.

The entire Nephila management team is set to remain with the firm and Nephila will continue to manage investments with the same strategies it employed before KKR came on board. In addition, all of the proceeds from the KKR deal will be reinvested in Nephila funds.

For KKR, the stake in Nephila provides them a way into the ILS space, and broadens its offering of alternative investment strategies and grows its hedge fund platform considerably. The investment in Nephila was made directly by KKR, not via any of its other funds.

This is a fantastic deal for the Nephila team giving them access to new resources and the strength of a business the size of KKR. It’s also a very positive deal for the sector and we expect to see interest in ILS managers grow from outside the space. With many private equity firms already actively assessing the ILS sector in a similar manner to how pension funds researched the space in recent years, we expect to see more private equity sourced capital flow into reinsurance fund structures in the coming years.

Nephila shutters two funds

Also announced was the fact that Nephila Capital are closing two of their investment funds to new investor subscriptions, citing its “current assessment of market conditions” as the reason.

This is an interesting development, as it usually tends to be smaller asset managers in the ILS space who are first to close funds due to a lack of new investment opportunities. It is possible that Nephila sees its funds as large enough after further successful fundraising at the end of 2012, however the lack of deal flow in the primary ILS and cat bond market so far in 2013 could be another contributing reason.

The investment committee at Nephila commented; “We are committed to building the optimal profile of risk/return for our investors and will continue to actively monitor our investment capacity in each strategy relative to market opportunities.”