Sometimes, when a headline hits, you just know the story is going to drag on for months, even years. The rushed sale of the Los Angeles Lakers for $12.5 billion is one of those headlines.
It has all the elements. There are big names -- the buyers are Bob Iger, the former CEO of Disney, and Josh Kushner... yes, the brother of Jared and, thus, by extension, tied to the president. The Lakers franchise is iconic. The price is the highest for any team in the history of sports. And the sale looks like just the beginning. Mark Walter, who is selling the Lakers, may have to unwind his whole sports empire, and we'll see a new wave of stories any time he sells one of the other iconic names in his portfolio: the Los Angeles Dodgers, the Premier League's Chelsea, the F1 Cadillac team, the WNBA's LA Sparks, and more.
This headline also, I'm sorry to say, includes the insurance industry. That's because the impetus for Walter's yard sale is a federal investigation into the at least $20 billion that he pulled secretly from insurance companies he controls so he could finance his sports empire. He hasn't been charged with any crimes, and the investigation could, of course, lead nowhere. There's also no indication at this point that others in the insurance industry are using their companies as banks, beyond what's allowed by law and routinely reported. But you can be sure that there will be lots of scrutiny both for insurers and, perhaps, for rating agencies.
Let's have a look.
The Wall Street Journal does its usual, thorough job of reporting all the complexities of the investigation into Walter and his financial services firm, Guggenheim Partners, so I won't recount them in detail here. I'll just note that the WSJ says there is about $1 trillion in private credit that insurers have disclosed they are providing to related entities, as Walter did, without disclosing the extent of those loans until recently. That's a lot of money.
As far as I know at this point, much of that stems from an open and seemingly smart approach that private equity firms are taking in life insurance. PE firms are buying life insurers and using their vast investment portfolios both to increase the PE firms' assets under management and to increase the yield that the insurers get on their investments. If PE firms produce better returns than the firms had been generating, then everybody wins.
Walter may, in fact, be able to offer that sort of defense -- what basketball players would describe as, "No harm, no foul." He led a group that bought the Lakers for $10 billion in June and sold the team just months later for 25% more. He led the group that bought the Dodgers in 2012 for $2.15 billion, and the team is now valued at perhaps $8 billion. But not all the investments were winners. The WSJ says Walter used funds from his insurance companies to, for instance, make an early investment in Beyond Meat, whose stock price has fallen from $4,700 to $11. Walter also leveraged his sports empire to buy personal properties, including mansions.
We'll have to see what happens when Walter unwinds the $20 billion of loans that his firm now acknowledges it didn't disclose.. and any additional ones that come to light now that the Feds are investigating his businesses.
But don't expect the scrutiny of him, or the insurance industry's investment practices, to go away any time soon.
Cheers,
Paul