Private equity may trigger buyout consolidation (amended)
UK - Consolidation in the buyout market is only going to increase, according to actuarial consultants, as it is suggested the private equity companies backing behind some newer entrants are more used to higher returns on their investment than competition in the bulk annuity sector is producing.
Richard Jones, principal at Punter Southall and author of the report: 'The End Game? - An analysis of the bulk buyout market & other de-risking solutions', said it is "quite obvious there are too many players in the market".
It is understood Pension Insurance Corporation (PIC) has bought out rival Synesis Life, both of which are backed by Royal Bank of Scotland and have strategic relationships with JP Morgan, following Synesis' failure to complete any buyouts since its establishment in May 2006, though PIC has so far refused to confirm or deny the acquisition of Synesis Life.
At the same time, Prudential has completed a re-insurance deal with Goldman Sachs regarding part of the £700m (€884m) Rank pension scheme buyout it completed in February. (See earlier IPE article: Rothesay Life completes first deal with Rank buyout)
Rothesay Life has confirmed that Prudential has taken on approximately £350m of the pension scheme assets under a bulk annuity re-insurance contract, while Prudential admitted an "update on the wholesale business" would be released at its interim results on July 31 2008.
Jones said as the transaction is simply a case of Prudential reinsuring part of the book of business "that's fine as it happens all the time", and as a result scheme members would not be affected.
However Jones believes firms could be put under pressure beyond the competition they already face as he claimed private equity backers used to receiving higher returns are instead seeing disappointing results.
"The market is nowhere as big as it needs to be, as there are not that many [pension funds] transacting because this is not new. It is something that schemes could always do, and the price has to fall even more dramatically if take-up is to increase," said Jones.
Although many consulting firms such as Aon and Lane Clark & Peacock (LCP) have predicted the buyout market will exceed £10bn this year, Jones suggested activity is likely to be quiet for the next few months. (See earlier IPE articles: Credit crunch boosts buyout market and Buyout market to pass £10bn in 2008)
He added while the market could hit £10bn it "would have to be low priced business", and the problem then is while "it's alright to do a few [deals] to get a presence in the market, the companies need to start making money".
The apparent emergence of consolidation in the buyout market follows research from Pension Capital Strategies (PCS) earlier this month warning buyout prices will start to rise as the market players reach their capacity, and this in could in turn trigger the development of a secondary market in reinsurance. (See earlier IPE article: Buyout prices to rise as market hits capacity)
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