Deals

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Goldman Sachs joined the throng of new entrants into the U.K. pension-insurance market back in 2007.

A decade later, it has managed something of a dignified exit courtesy of Blackstone Group LP, Singapore's sovereign wealth fund GIC and U.S. insurer MassMutual.

This is a business that has proved much easier to get in to than get out of.

As company bosses became more concerned in the mid-2000s about the unpredictable cost of retirement obligations, demand soared for insurance that would underwrite those liabilities, reducing the uncertainty.

The existing providers of pension plan buyouts, Prudential Plc and Legal & General Group Plc, suddenly faced competition from what looked like smart money from investment banks and alternative asset managers.

The Goldman vehicle, Rothesay Life, is among a handful to survive. Lucida, backed by Cerberus Capital Management, struggled to gain scale and was later gobbled up by L&G. Paternoster, supported by the likes of Deutsche Bank and hedge funds Eton Park Capital Management and CQS, was bought by Rothesay.

The New Entrant Grows Up
Rothesay Life has grown its balance sheet through successive pension buyouts since 2007
Source: Bloomberg
Total liabilities and equity

Meanwhile, Rothesay has grown to manage some 24 billion pounds ($31 billion) of assets. In 2013, Goldman pulled in Blackstone, GIC and Massachusetts Mutual Life Insurance Co. as co-investors. Blackstone's investment is through David Blitzer's tactical opportunities unit.

Yet even now, Rothesay isn't ready for an initial public offering that would provide an exit for its backers.

Insuring pensions is a long-term business. Cash generation increases only slowly as capital is released when policies end on the death of the customer. That means it's hard to fund new business growth and pay predictable dividends to stock-market investors. The inflection point comes when the so-called back book of existing policies has grown to such a size that it's generating enough cash to do both.

Look at London-listed Just Group Plc. It trades at a discount to book value and still has a measly dividend yield of just 2.5 percent. Rothesay has paid the occasional special dividend, but for it's still focused on growth.

Life as we Know it
Pension insurer Just Group has struggled to match the market
Source: Bloomberg

With an IPO still some way off, and Goldman understandably itching to get out after a decade, the challenge for the investment bank was to find patient investors willing to accept the model.

Goldman is lucky its co-investors have obliged by each agreeing to buy some of its stake. The deal values Rothesay at about 2 billion pounds, a slight discount to embedded value. Like the U.S. bank, though, the buyers may have to wait some time for their own exit.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net