In its latest move to bolster its asset management arm, Kohlberg Kravis Roberts has found an unusual partner: a hedge fund seeking to invest in natural disasters.
The investment firm said on Wednesday that it had taken a 24.9 percent stake in Nephila Capital, an $8 billion firm that focuses on reinsurance opportunities tied to catastrophes like hurricanes and earthquakes. (The investment is being made by the firm itself, rather than through any of its private equity funds.)
Long known as a private equity powerhouse, K.K.R. has steadily built up other businesses that diversify its operations, moves arising in part from the firm’s transormation into a publicly traded company.
The investment in Nephila is the latest expansion by K.K.R.’s asset management business, which has grown in recent years through moves like a deal to buy Prisma Capital Partners, a fund of hedge funds.
But Nephila may be one of the division’s most unusual partners yet. The nearly 10-year-old firm, a spinoff from the Willis Group, makes money by taking on the risk of natural disasters from insurers. The bet is that by spreading out its investments across an array of catastrophes â€" a hurricane hitting the northeastern United States, an earthquake roiling Japan â€" will offer enough diversification to limit risk from any one incident.
As one of the few firms that focuses on reinsuring natural disasters, the hedge fund can charge higher premiums to assume that risk. One area that Nephila has focused on is working with state governments! , like Florida and California, that have been eager to find counterparties that will assume the risks that their populations bear.
Nephila’s principals, Greg Hagood and Frank Majors, have argued that their firm is attractive to investors because its returns aren’t tied to stock markets or other asset classes.
While the business sounds esoteric, Nephila’s team is well-known to K.K.R., which owned Willis at the time of the investment team’s inception.
“In backing Nephila, we are partnering with a team we have known for more than 15 years, dating back to our investment in Willis Group,†Henry R. Kravis and George R. Roberts, K.K.R.’s co-founders, said in a statement. “As the first dedicated manager of catastrophe risk investment strategies, they share the entrepreneurial spirit that pervades K.K.R.’ culture and, with an excellent 14 year track record, we think they are the best team in the industry.â€
