Fortitude Re is set to receive a capital contribution of $525 million from its minority shareholder, T&D Holdings, while also having struck a new advisory agreement with its largest shareholder, Carlyle Group.
T&D and Carlyle, which own 25.0% and 71.5% of Fortitude Re, respectively, acquired their interests in the reinsurer from AIG last year in a transaction worth $2.2 billion.
Now, T&D’s subsidiary, T&D United Capital Co. (TDUC), has agreed to make a large investment into the reinsurer, funded from internal sources.
Fortitude Re then plans to raise capital amounting to $2.1 billion from TDUC and Carlyle, with the capital to be deployed for business growth and other expenses through its operations.
Carlyle has raised the $2.1 billion for Fortitude from the reinsurer’s existing investors and will commit up to $150 million from its balance sheet toward the total, according to reports from the Wall Street Journal.
For Carlyle, the investment forms part of a new advisory agreement with Fortitude Re, which will see Carlyle earn a recurring fee on all of the reinsurer’s asset for assisting it with acquisitions and identifying new growth opportunities.
The deal is expected to significantly boost Carlyle’s asset under management, with reports suggesting the fee-earning assets of its credit segment will increase by $50 billion, while annualized fee-related earnings will similarly climb by $50 billion.
The Wall Street Journal notes that the move is indicative of a larger trend whereby large private equity firms are seeking ‘permanent capital’ in the form of steady fees from the re/insurance industry. But unlike other recent deals, the fee paid to Carlyle will be based on the reinsurer’s overall profitability.
“We had to have a fee structure that’s really tied to the performance of Fortitude,” Carlyle Head of Global Credit Mark Jenkins was quoted as saying. “That creates a virtuous circle because ultimately we’re incentivized to grow in a way that benefits our investors.”
The agreement between Fortitude Re and Carlyle is expected to take effect from April 1st, 2020.
King & Spalding LLP and Nishimura & Asahi were credited as having provided legal counsel to T&D for its investment into the reinsurer.