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One podcast to start: the FT’s Unhedged Podcast looks at three surprises that might spook the markets.
In today’s newsletter:
A new twist on an old bet with Buffett
An Apollo-backed insurer is coming for the UK’s pensions
Dutch pension funds set to sell €125bn of government bonds
A new wager of the century?
Back in 2007 Ted Seides, the founder of Capital Allocators and former president of Protégé Partners, entered into a now legendary $1mn charitable bet with Warren Buffett. The wager? That a group of hedge funds could outperform a cheap and cheerful index fund tracking the S&P 500 over the course of a decade.
Dubbed “Buffett’s Big Bet” by Fortune magazine, it looked promising for the hedge funds in the initial early years around the global financial crisis, but the market rallied strongly thereafter. By the time of Berkshire Hathaway’s 2016 annual report, Buffett was able to take a victory lap.
In this guest post for our friends over at FT Alphavile, Seides reveals that he has recently thought of another bet that has equal — or greater — importance than the first. What’s the bet? Private equity versus the S&P 500.
He writes:
Comparing a portfolio of North American buyouts to the S&P 500 has important consequences, as private equity enters wealth management and seeks to access pension plans. In fact, I’d argue that this match-up could help shed light on one of the thorniest, most contentious debates in finance today.
I imagine we know what Warren thinks — high fees and extra expenses will doom private equity investors. A lot of outside factors could have impacted the result of our first bet, but that’s unlikely to happen with this comparison. This bet is much closer to faithfully representing Warren’s initial premise: that intelligent professionals with strong economic incentives to perform still cannot overcome the high fees they charge.
Both the S&P 500 and North American buyouts offer diversified exposure to the US economy. Businesses in public and private markets are similarly impacted by macroeconomic variables and have common geographic and sector exposure. (While the Mag 7 dominates the S&P 500, software and technology are the most represented sectors in buyouts.) Their pricing (P/E of stock and EV/EBITDA of buyouts) is correlated, in part because transactions between the two markets can arbitrage large pricing discrepancies.
The question, then, is whether their differences are enough for private equity to make up for the costs of doing business. Leverage, size, dispersion, illiquidity, and control each — in theory — positively impact private equity returns relative to the S&P 500.
Seides puts the odds of private equity outperforming the S&P 500 net of fees at about 40 per cent, which says next to nothing about what investors will actually experience.
What do you think? Email me: harriet.agnew@ft.com
An Apollo-backed insurer is coming for the UK’s pensions
Earlier this month, a European insurance group created by Apollo Global Management struck a £5.7bn takeover of UK retirement savings group Pension Insurance Corporation.
The biggest UK deal of the year so far relates to the obscure but lucrative insurance niche of pension risk transfers or bulk annuities. Over the next decade, British companies are expected to offload about £500bn of retirement obligations and the assets backing them to insurers via pension risk transfer agreements as they wind down defined benefit pension schemes.
The business has boomed as higher interest rates closed schemes’ deficits, making sales to insurers more attractive and spawning a market dominated in the UK by Goldman Sachs’ former unit Rothesay, London-listed insurer Legal & General, and the PIC, which Apollo-backed Athora agreed to buy.
PIC already became a juggernaut in pension risk transfers under the stewardship of investment group Reinet Investments, buyout firm CVC Capital and private credit shop HPS Investment Partners. The company has grown its assets nearly 10 times since Reinet first took a stake in 2012.
Athora’s acquisition of PIC heralds the private equity giant Apollo’s arrival into the continent’s largest retirement market, as my colleagues Lee Harris, Sujeet Indap and Antoine Gara explore in this deep dive.
Buying PIC will hand Athora a fifth of the UK bulk annuity market in one fell swoop, a route that Apollo’s US private capital rivals KKR and Carlyle had each explored before Athora struck its deal.
Whether or not the PIC acquisition ends up being a good deal for Athora may ultimately depend on how much risk it is able to shift offshore through so-called funded reinsurance. UK regulators are more open to the strategy than European ones, but the practice is under scrutiny by the country’s Prudential Regulation Authority.
The challenge will be for the two Americans — Mike Wells and Todd Solash — tasked with leading Athora’s charge to prove they can squeeze more value from the UK’s life insurance market than its previous private equity owners, in a market that is already highly competitive.
Chart of the week
Dutch pension funds are set to put pressure on European government bond markets later this year as they start to sell about €125bn of long-dated bonds because of a substantial reform of the retirement sector, writes Mary McDougall in London.
Between 2025 and 2028 the €1.5tn Dutch pension industry is transitioning from a system in which final payouts to pensioners are guaranteed to a defined contribution framework, in which employers are only tied to the amount they put in. That will mean holding much less long-term sovereign debt to back their long-term promises and freeing up more funds to invest in higher-returning assets such as equities and credit.
While a handful have already switched, Dutch funds managing close to half of the total assets that need to be transferred are set to convert in January next year, with managers expected to prepare portfolios in the run-up. Strategists at Dutch bank Rabobank expect €127bn of long-term sovereign debt will be sold over the course of the transition.
The sale is the latest example of declining demand for long-term debt among pension funds which, coupled with record levels of sovereign borrowing, has helped push up bond yields around the world.
“Everyone is worried about the European long end” of the bond market, said Pooja Kumra, a rates strategist at TD Securities, adding that sales may come “very quickly at the end of the year . . . but pre-emptive trades could be punitive if there are more delays”.
Rising bond yields are piling pressure on policymakers as Europe increases its borrowing to fund its defence and energy ambitions, led by Germany’s €1tn “whatever it takes” spending plan. Long-dated Eurozone debt has been hit especially hard.
Dutch pension funds, which are by far the largest in the Eurozone, have used interest rates swaps and government bonds across different time horizons, even over 50 years or more, to match the period over which they must make payouts to their youngest members.
But as funds move to a system where they pay out based on returns, they are set to move towards riskier assets such as equities and credit, which they expect to generate higher returns for their members over the long term.
Five unmissable stories this week
US stocks’ record highs obscure the risks Donald Trump poses to the world’s biggest economy, according to senior executives from Amundi to JPMorgan Chase who have warned over growing “complacency” in the markets.
Enasarco, a small Italian pension fund, is set to play a crucial role in Monte dei Paschi di Siena’s hostile bid for rival Mediobanca after it ploughed almost 70 per cent of its total European equities allocation into the Milanese bank.
UK insurer Legal & General has struck a private credit partnership with Blackstone that the US alternative assets giant said could be worth up to $20bn by the end of the decade.
Jupiter has agreed to buy CCLA, the biggest manager of money for UK charities, in a £100mn deal as the group seeks to grow its assets after a period of poor performance and client defections.
The UK government’s plan for pension reform has been called into question after Bank of England governor Andrew Bailey said he did not think it was appropriate for ministers to mandate investment in British assets.
And finally
‘Bathers’ (c1899-1904) © Paul Cézanne
A new exhibition at the Musée Granet in Aix-en-Provence shows how the city shaped Paul Cézanne’s shift from tradition to modernity.
To October 12, museegranet-aixenprovence.fr, cezanne2025.com
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