Thomas E. Finser
WHAT IS PERMANENT INVESTMENT CAPITAL?
Brief explanation of permanent capital and why private equity is buying insurance companies.
|
Today, permanent capital plays an important role for institutional fund managers. The seminal idea and implementation of this concept originated with the development of the Widows' Fund in 1744. The term "permanent" refers today as it did in the 18th century Scotland Enlightenment, to long-term investments that do not have a predetermined time frame. Unlike traditional funds that allow investors to redeem their investments periodically, permanent capital vehicles may invest indefinitely.
Warren Buffett's Berkshire Hathaway is one highly successful example of a permanent capital structure. Berkshire acquired an insurance company, National Indemnity in 1967. Insurance operations offered Berkshire long-term low-cost investment funds as summarized by Buffett in the 2009 Annual Report:
Warren Buffett's Berkshire Hathaway is one highly successful example of a permanent capital structure. Berkshire acquired an insurance company, National Indemnity in 1967. Insurance operations offered Berkshire long-term low-cost investment funds as summarized by Buffett in the 2009 Annual Report:
Insurers receive premiums upfront and pay claims later. In extreme cases, such as those arising from certain workers’ compensation accidents, payments can stretch over decades. This collect-now, pay-later model leaves us holding large sums – money we call “float” – that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit. (Buffett 6) |
The available capital or “Float” is highly attractive to investment managers. A 2015 Financial Times article astutely observes that permanent capital funds are the “holy grail” of investment managers, supplying a “never-ending” source of funds (Foley and Sender). The capital "float" of the Widows' Fund is one such example. McKinsey & Company notes, life and annuity insurance operations are “well stocked with assets” for investment managers to employ and the stable asset pool has attracted interest from private equity fund managers (Balasubramanian, D’Amico, et al 2).