KKR aims to help Nephila Capital accelerate its growth

Unless you’ve had your head under a rock for the past month you’ll be fully aware of the high-profile deal which took place at the end of January and saw private equity and buyout giant KKR & Co. L.P. (or Kohlberg Kravis Roberts) acquire a 25% stake in the largest investment manager in the insurance-linked securities (ILS) and reinsurance sector, Nephila Capital. In its Q4 earnings call, KKR’s management expressed its desire to help Nephila accelerate its growth.

KKR have been pursuing a number of strategic acquisitions in recent months, with the expansion of its hedge fund business being an area of focus. The purchase of a 25% interest in ILS manager Nephila Capital fits nicely within its strategy of growing its hedge fund capabilities, gives KKR access to new investors and as KKR’s Global Head of Capital and Asset Management, Scott Nuttall said on the earnings call, is viewed “As a good way to deploy capital at a high return.” KKR views this kind of deal with Nephila as a way to acquire growth in-organically and it intends to continue to pursue these opportunities.

Nuttall commented that KKR’s hedge fund platform is an area the firm has been investing in meaningfully. With Nephila Capital it hopes to be able to plug the acquisition into its platform and hopefully help Nephila to scale. Nuttall explained that KKR has known the Nephila Capital team for almost 15 years, as KKR were involved as owners of Willis Group when Nephila was a division of the broker.

Nuttall commented that Nephila; “Have really been the pioneers in marrying the opportunities in the reinsurance market with investment management product that is appealing for institutional investors.” Clearly KKR have seen the value of the reinsurance-linked and ILS investment strategy, and Nuttal added; “What they’ve been able to do is create a product that is in effect, it’s like a one to three year lockup hedge fund type product that institutional investors can invest in that critically generates returns that are not correlated with the public markets.”

So KKR has a desire to expand its hedge fund platform into an area that allows it offer a product which could be highly complementary to its existing hedge fund type operations. The low correlation, stable return profile that Nephila’s suite of funds and products can offer will likely be very attractive to KKR’s existing hedge fund customers and also enable KKR to reach out to new investors and markets.

Nuttall said that KKR believe that Nephila will continue to be able to offer unique, non-correlated products which meet a need the investment market currently has. He said that they are continuing to evolve the offering and that KKR thinks they will be able to scale their business.

Interestingly, Nuttall said that KKR has noticed a trend towards the trading values of traditional insurers and reinsurers slipping and that this could present an opportunity for operations like Nephila to come in and fill the gaps where there are interesting underwriting opportunities. In particular the fact Nephila offers fully collateralized reinsurance protection could give it an edge, hinted Nuttall, as it is not constrained in where or how it operates, as rated traditional players are. Nuttall closed his comments by saying that he felt Nephila Capital had done a very good job of developing its business and that KKR is hopeful it can help to accelerate Nephila’s growth.

With a firm of the size and scale of KKR assisting it will be very interesting to see just how much Nephila Capital can grow its business in the coming years. Nephila Capital has already recently expanded its operations by becoming the first of the ILS fund managers or collateralized reinsurers to become active in the Lloyd’s of London market by directly backing a Syndicate.