 "Insurance")
Insurance companies collect premiums from people seeking protection from a future event, and in turn, compensate customers who experience losses from this insurable event. This creates a cash-surplus for insurers, which they deploy to meet customer liabilities and generate shareholders returns. It effectively makes an insurance company both a risk mitigant for customers, and a source of long-term capital for enterprises.
Since they hold much of this capital in trust for their customers, it is imperative for them to balance their risk and rewards over the longer term. They make strategic calls on portfolio allocation, along with regular tactical calls, based on market conditions, and then finally, individual asset allocation decisions. Insurance firms — directly and indirectly — invest in debt and equities in the public markets, while they have stayed largely away from private markets.
Given the gradual rise in private markets and the adoption of tech, an increasing amount of capital is finding its way into early and growth-stage digital-tech startups. Private equity (PE) and venture capital (VC) firms have invested $49 billion in Indian companies in January-September 2021, allowing entrepreneurs the time and ability to perfect their business models without compromising on growth. With access to capital becoming easier, proven business models no longer tap into the public markets as early in their journey as they did.
Startups have not only created investor value, but also created vast amounts of employment. They have helped kick-start the gig economy, built up infrastructure, helped create small and medium enterprises, increased customer convenience and reduced prices. Startups have created products and ecosystems to help businesses run more efficiently and also grow, creating millions of employment opportunities indirectly. While this has helped entrepreneurs, public market investors have had to wait longer to benefit from the growth journey of these assets. In 2021 alone, 32 digital-tech startups become unicorns, taking the total count to 69, of which only one is listed.
Insurance companies fit the profile of what PE-VC firms look for in a leveraged partner — patient capital with a long-term view of value creation. While they have been active participants in the public markets, their view towards investing lends them to becoming investors in the private market. In order to leverage the return potential of private markets, direct investing in a fund, or a fund-of-funds (FoF) structure, would be an ideal conduit to funnel their capital into this asset class. Insurance companies in the United States managed assets of $9 trillion in 2020, of which $93 billion was invested in PE, up 15 per cent over 2019. This also allows them to generate alpha and diversify their investments.
Today, we have a proven pool of PE and VC firms with a longitudinal history of consistent performance in creating value and impact. Over time, these firms have developed expertise in helping founders innovate, scale, and navigate problems, all while creating investor value and demonstrating exits, both through public markets and strategic routes. Insurance firms can invest in PEs and FoF structures and take this time to build their capabilities to eventually directly access private companies and funds.
The regulator has also made requisite changes to help insurance companies invest in private markets. The Insurance Regulatory and Development Authority of India’s move to allow insurance companies to invest in FoFs is a major boost. This structure creates a vehicle for insurers to indirectly invest a large pool of capital in private markets while mitigating the attendant risk. Indian insurers managed Rs 39 trillion in assets fiscal year 2019. Assuming they follow their US counterparts to deploy a part of their assets in the private markets, it would open a significant tap of domestic capital for our entrepreneurs. This would also help local PEs and alternative platforms achieve global scale in line.
The writer is co-founder and managing partner of Gaja Capital
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
