9/9/2024

Good morning.

• The jobs market remained relatively stagnant, avoiding further deterioration that some investors feared. Unemployment levels currently are at 4.2%.

• An aggressive 50 basis point rate cut to kick off what is expected to be a prolonged cutting cycle is unlikely. The jobs report, which was not cataclysmic to the market, will likely lead the Fed to stick to a 25 basis point cut as futures now point to a 75% chance of 25 basis points.  

  • It's important to note as the Fed begins to cut rates that it likely will not have a linear trajectory, and increased volatility will follow suit. Markets are increasingly interpreting economic data as a gauge to predict what the Fed will do rather than use it to look at the health of the underlying economy.   

• Markets will be tuned in to what might be the only presidential debate for this election. This Tuesday in PA will be the first time the two candidates’ policies go head to head.

• Nvidia being subpoenaed by the DOJ for antitrust allegations led to a rapid fall in share price. 

• Markets will remain volatile for the foreseeable future, as many unfolding factors will continue to be priced into the market. Market participants looking to hedge risk have led a 45% increase in the VIX over the past 5 days.

In today’s newsletter we will include:

• Market Updates 

• Private equity's acquisition of insurance companies

• Key drivers to look out for this week 

Markets 

• This past week the U.S. equity market fell in a chaotic fashion. This marks the worst week for the S&P 500 since April. What key events transpired?

  • Mixed labor data released on Thursday and Friday once again sparked investor fear over increased recession risk. 

  • Nvidia shares fell 13% over the past week following a subpoena issued by the Justice Department. The DOJ alleges that Nvidia is making it more difficult to switch to chips from other manufacturers, which is potentially an antitrust violation. The company's market cap has fallen to $2.52 trillion from its high of $3.35 trillion. 

• The overall market drifted lower last week, but the technology sector was hit hardest due to the decline in Nvidia’s share price coupled with the general malaise. Investors have become less optimistic about the time frame for the rollout of AI technology. A market shift is upon us where earnings must prove the success of this new technology. The question remains whether AI will live up to its sky high expectations. 

Private equity taking stake in insurance companies

Alternative investment behemoths of the likes of Apollo are increasingly taking stakes in insurance and retirement services. Alternative asset managers invest in a range of illiquid assets which notably include speculative illiquid private debt. Investing in illiquid debt is a specialty of asset managers that has proven especially beneficial in tandem with needs of insurance companies.

Insurance companies generate cash flow from selling coverage but maintain a large amount of liability including annuities payments, claims etc. Regulatory requirements and the nature of the business require a low risk profile to insure that they can cover their liabilities. Insurance companies struggle to earn attractive yields on low risk treasuries and low risk corporate bonds. Insurance companies have a large book of business and in essence act like an investment fund to seek a return on their capital.

Partnering or being acquired by savvy investment funds allows these staggering amounts of AUM to be put to better use. Annuities have long durations and can earn a far more attractive yield in the private markets than in traditional low risk fixed income investments. Asset managers acquire insurance companies because they believe they can make larger returns on the insurers’ books. Additionally, owning insurance companies allows managers greater flexibility. They can use their insurance companies to invest in high tranche low-risk debt while investing in more speculative debt through their asset management arms. In addition, asset managers see annuities and other insurance services as a growth business. 

Private markets are growing more popular and accessible to insurers. This shift in management of insurers’ capital is a structural shift in the capital markets. It is intertwined with other structural shifts we have spoken about such as private credit, high interest regime, and increased regulation.

Notable acquisitions

(Note to readers: Deal flow was particularly high in 2021 because insurance companies’ yields were significantly affected by near-zero interest rates. Asset managers bought distressed insurance companies.)

(2021) APOLLO’s acquisition of Athene, a leader in fixed annuities and retirement services

• Major strategic move to strengthen its financial position by integrating its private equity and insurance operations

• Valued at around $11 billion, all-stock deal

• The acquisition provided Apollo with a steady source of long-term capital from Athene's insurance premiums, enhancing its ability to invest in higher-yielding assets. 

• Marc Rowan, CEO of Apollo and a champion of increasing access to private markets, described Apollo’s investment in Athene: “in 2008, we started with a $16 million dollar equity investment, we ended the year at $330 billion, and have become the largest provider of retirement products in the U.S…. an awesome business.” (2023, Barron’s)

(2021) KKR’s acquisition of Global Atlantic, one of the largest fixed annuity and life insurance providers

• In 2023 KKR completed a multi-billion dollar acquisition of Global Atlantic.

• The insurance company has over $158 billion (Reuters) in AUM.

• Pivotal move to expand its presence in the insurance sector 

• Allowed KKR to access a stable, long-term source of capital through insurance premiums

(2021) Sixth Street’s acquisition of Talcott Resolution, an insurance service and annuities provider

• Deal valued at approximately $2.25 billion

• Acquisition highlights how private equity firms are looking at insurance and retirement businesses as areas for long-term growth

• With over $90 billion in liabilities, Sixth Street is able to take a more innovative approach in managing it.

• “This is a significant step in our commitment to the insurance sector.” (CEO Alan Waxman)

As private markets become a larger part of capital markets the introduction of retirement and insurance services, with trillions under management, will be incredibly interesting to watch. Savvy investment firms are seeking to revolutionize how these traditional businesses are managed. This will have massive implications for pensions, asset managers, financing, retirement for individuals, and much more.

What to look out for this week

• Monday: Consumer Credit (July), Goldman Sachs Communacopia & Technology Conference begins, Apple event, Oracle earnings 

• Tuesday: GameStop earnings

• Wednesday: Consumer Price Index (August), the final inflation data before the September FOMC meeting

• Thursday: Adobe earnings 

(Investopedia)

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights

Authors: Ben Banchik, Zachary Singer

If you like this newsletter check out our website for more information. Forward it to your friends!

Sign up:https://sb-cap-insights.beehiiv.com/

Want to reach out? Contact us at [email protected]

We welcome feedback as it is our goal to foster discussion and different points of view as we strive to improve our work.

⬇️Social Media⬇️