As Nephila hits $10 billion, its contribution to KKR grows

Nephila Capital, the insurance-linked securities and reinsurance-linked investment markets largest asset manager, passed $10 billion of assets under management at the end of 2013, according to KKR & Co. L.P. (Kohlberg Kravis Roberts) executives.

Nephila Capital has not been raising capital as quickly as it could in the last year, with a number of its insurance linked investment strategies closed to new investors at times, but still it has managed to grow its assets under management by 25%, from around $8 billion at the end of 2012 to finish 2013 with over $10 billion under management.

The data was revealed by KKR & Co. L.P. executives during the private equity and buyout giants fourth-quarter earnings call yesterday. KKR bought a 25% stake in Nephila Capital just over a year ago and also revealed that its relationship with the ILS manager is now paying a growing contribution to the firm as well.

KKR co-chairman and co-CEO George Roberts said recently that the Nephila Capital deal was something that worked both ways, in that both KKR and Nephila could find benefits by working together to increase Nephila’s assets under management.

Roberts said that KKR will benefit by helping Nephila Capital to grow and that it can take what Nephila Capital has achieved and, if the capital deployment opportunities can be found, introduce Nephila to some key investors that KKR has. Roberts also said that the relationship with Nephila is already generating meaningful earnings for KKR.

Some idea of the level of earnings contributed by Nephila Capital to KKR was also revealed in the earnings call yesterday. William Janetschek, CFO of KKR Management LLC, said that KKR saw a meaningful increase in incentive fees in the fourth-quarter, with Nephila Capital making a contribution to this.

Economic net income at KKR’s public markets division was $73.3m during the fourth quarter, primarily driven by fee related earnings which includes the incentive fees earned from its stake in Nephila Capital. Total incentive fees in the fourth-quarter of 2012 were $12.35m which almost tripled to $36.695m in the fourth-quarter of 2013.

Scott Nuttall, Head of Global Capital & Asset Management Group and Principal at KKR, said that Nephila Capital accounted for about 25% of the firms fourth-quarter incentive fees, which suggests just over $9m for the quarter.

Nuttall said of Nephila and KKR’s other similar initiatives; “Profits grew significantly, integration went smoothly and the businesses contributed to the origination and investment capabilities of the firm as a whole.”

Nuttall is positive about the future of KKR’s stake in Nephila Capital and clearly sees the opportunities to benefit each other increasing over time.

He explained; “The integration has gone really very well. The fund-raising teams have been working together. We’re starting to see the pipelines continue to build in terms of jointly sourced opportunities. So I’d say it’s still quite early days. And the good news is when you look at the backlog of potential fund-raising opportunities and you look at the product development ideas, I think there’s a lot of good things ahead.”

Janetschek explained how KKR expects to realise its incentive fees from its stake in Nephila; “Generally speaking, Nephila is going to realize its incentive fee once a year. So you might see small amount come through, through the first three-quarters if there are redemptions, but you’re not going to see any significant activity. Again, you’ll only see that pop if performance is there in the fourth-quarter.”

Nuttall commented on Nephila’s assets under management, saying that the ILS manager finished the year with ‘a bit over $10 billion’, adding that the firm had a very strong incentive fee quarter and year.

Then commenting on Nephila Capital alongside another similar investment KKR made (Prisma), Nuttall said; “Overall, frankly both are well ahead of our expectations in terms of their first year financial results, so the performance has been strong. Virtually all the assets across the strategies are above the high watermarks and off to a great start.”

So, clearly KKR is realising real benefits from the stake it has in Nephila Capital and the beneficial mutual relationship between the firms. With Nephila Capital having passed the $10 billion of assets under management mark, the first ILS manager to reach that milestone, these real benefits are only going to increase and it will be interesting to see how the contribution KKR’s stake in Nephila Capital makes grows over time.

Read our other recent article on KKR and Nephila Capital:

– KKR & Co. L.P. and Nephila Capital, the benefits flow both ways.