Skandia Life: we’ve made money on private equity

Who says insurance companies don’t have a good sense of humor?

the Skandia Life study

The Financial Times reported today that Skandia Life has done a proprietary study that “proves” its investments in private equity have made money for the company, even from purchases made during the wildest days of the middle of the last decade–when loans were flowing like water and everything not nailed down was being bid for at very high prices.

Despite this, Skandia concludes that its private equity investments earned it “between six and 14 per cent per year” better than publicly traded equities (which would likely have lost some money during the period).  The print newspaper article said the margin of outperformance was “between 0.8 and 1.5 per cent,” a set of figures that the FT apparently subsequently changed.  I don’t know which is correct.  (I’ve looked for the study on the internet but have been unable to find it.  So all I have to go on is the FT newspaper and website.)

the study’s assumptions

To get the Skandia results,  you have to make a number of (heroic) assumptions.  They include:

1.  that the private equity people who sold Skandia its deals worked for free.  That is, they collect no fees and have no carried interest.

2.  that estimates of the current values of the companies bought, which are made by the private equity firms doing the buying, are fair and accurate.  There was apparently a “third party” check on the figures,  presumably by the investment banks who were paid by the private equity firms to line up and help finance the deals.

3.  that the highly leveraged acquisitions of poorly-performing companies are no riskier than buying, say, a stock index ETF, so no adjustment to returns for”extra” risk needs to be made.

are they believable???

How likely are any of these suppositions?  In New York they say…”If you believe this, I have a bridge you might be interested in buying.”

The icing on this comedic cake is the answer to the question, “What financial professional could possibly have approved this study and endorsed its dubious results?”    …why, the guy in charge of giving Skandia Life’s money to private equity, that’s who.

In the thrust and parry of bureaucratic infighting in large companies, I can see why someone might call for a justification for making private equity investments at the top of the market to be made.  And I can see how a study like the FT writes about might have been the response.  What I don’t understand is why the authors would want it made public in any form.

On the other hand, maybe they didn’t.





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