Private equity poppycockArticle added by Kevin Startt on April 15, 2013
Kevin Startt

Kevin Startt

Kevin Startt, GA

Joined: June 21, 2012

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Metlife’s exit from the banking industry and Genworth’s departure from the mortgage industry may spell the end of the financial services industry’s infatuation with a concept that was universally accepted in the 1980s and known as the financial services supermarket.

At one time, when Sears acquired insurance company, Allstate, broker, Dean Witter, and real estate agency, Caldwell Banker, it looked like the cross-industry colossus would dominate, with corporate conglomerates monopolizing the American financial services landscape.

Instead, the trend became a drag on earnings and an integration nightmare. About the only relics left from the era is the bank in the supermarket and automaker finance companies.

One could write a novel the size of “War and Peace” about the attempt to cross-sell washers and dryers to investors and homeowners insurance to tool time Tims.

I remember joining investment banking powerhouse, Donaldson, Lufkin and Jenrette, owned by AXA, which also owned clearing firm, Pershing. Our objective was to convince rank and file life insurance agents to send their middle income clientele over to our side to buy a private equity fund or leveraged buyout fund. Conversely, the DLJ brokers job was to refer their clients over to buy an annuity at AXA.

After a leading FIA carrier wrote off hundreds of millions of dollars in the mid- 2000s with its ill-fated purchase of Germany’s third largest bank, Dresdner Bank, you would think it would be the last company to criticize private equity’s entrance into some poorly managed indexed annuity companies that offer potential growth in a $22 trillion dollar retirement market. This company featured a sales piece comparing private equity’s entrance to the growing indexed annuity industry with the piano company Baldwin United’s ill- fated entry into the fixed annuity business in the early 1980s.

The comparison is ludicrous, as a private equity company's job is to simply turn a profit for shareholders and bolster a company that has lagged in its respective industry. Although private equity companies performance can vary substantially, comparing them to a piano company with no annuity or insurance experience is a bit ridiculous.

The private equity firm I represented, along with quality private equity managers like Bain Capital, Apollo Group or Soros, may have different time spectrums from moribund management at insurance companies. They can also turn a pretty good profit that can mutually benefit policyholder, shareholder and agents.

At one time, Julian Robertson at Tiger Management, had a 44 percent average annual return with less risk than the S&P 500 and owned a few insurance companies.

I'm not saying that private equity companies are good for the annuity industry, but neither is mediocre management. Metlife and many other insurance companies' foray into banking after the passage of Gramm-Leach-Bliley in 1999 and the erosion of Glass-Steagall was made before the passage of Dodd-Frank and after a string of disappointing results to shareholders, including large write-downs. It was not made, however, by a piano company buying an annuity company, but by private equity managers who are paid richly to help industry laggards earn a fair return for stockholders, policyholders and their agents. Certainly, George Soros's billion dollar bet against the yen yields a short-term profit that is totally different than Carl Lindner’s 30-year bet on Great American which has turned out splendidly for shareholder, policyholder and agent alike.
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