If you’ve ever investigated variable annuities or variable life insurance you know that the investment options consist largely of “mutual funds.” For some years now the large U.S. mutual fund companies have offered both retail funds and funds offered solely to insurance company separate accounts (i.e., “insurance dedicated funds”). In many cases the insurance dedicated fund is an exact clone of the retail fund. There are two reasons for the two different offerings. One reason is purely a technical tax reason which is beyond the scope of this blog but suffice it to say, the division of retail funds and insurance only funds is a tax necessity. The second reason is much more practical and, perhaps, much more important. The insurance-only funds attract incremental assets from an alternative investor population. The insurance related assets can, in some cases, almost double the fund family AUM.
Outside the retail arena, in the world of alternative asset management, the industry has yet to embrace variable insurance as a method of asset gathering. Just as in the non-insurance universe, non-registered funds can only be offered to investors meeting the minimum income or asset requirements of an accredited investor. In insurance parlance this type of policy is known as private placement insurance or “PPI.” Currently, PPI is written by select insurance companies mainly at the request of investors. However, PPI could be utilized affirmatively by alternative asset managers as a means of raising incremental assets.
In the past insurance companies may have been reluctant to place a particular alternative investment fund on their variable platform due to the relatively small market for alt. investments and the inherently restrictive marketing practices. However, now due to the Jobs Act permitting private investment funds the ability to elect to openly market themselves, this may encourage insurance firms to actively market alternative offerings.
If the historic ratio of retail assets to insurance assets for registered funds is any indication, a shift to variable insurance offerings may give the U.S. alternative asset management industry the ability to increase its assets under management by a significant amount. Regardless of the ultimate scope of the opportunity, every alternative asset manager interested in raising assets should be considering the variable insurance space in addition to the traditional marketplace.
If you have any questions regarding variable insurance or any other issues pertaining to the alternative asset management industry please contact your regular WithumSmith+Brown partner.