The rising interest rate environment of the past 18 months has had a significant impact on the alternative investment industry, with fundraising across all the main segments – hedge funds, private equity, private debt, real assets – falling in 2022 and then again this year as global capital allocators pivot to assets that are perceived as having lower risk, higher liquidity and now, for the first time in more than a decade, an acceptable yield.
The impact has certainly been felt in the life settlement market.
“You can get a four-week US treasury bill for around 5% at the moment,” said Jonas Martenson, Founder and Sales Director at life settlements investor Ress Capital. “It’s had a big impact on asset raising in our space.”
What’s unclear is how long the current macro-economic situation will persist. In September, both the Bank of England and the US Federal Reserve held interest rates steady for the first time in more than a year, providing optimism for certain investors. But for Martenson, the current situation highlights something that he thinks the life settlement space more broadly should be promoting regardless of the prevailing macro-economic and capital markets climate.
“Investors like the uncorrelated returns. I think we should be pushing that more closely,” he said. “The asset class is still very unknown. Most investors in most countries have no idea that an American can sell their life insurance policy. Life settlements is truly uncorrelated so if you take the positive side, there are a lot of investors waiting to be educated who have never heard about the asset class.”
The uncorrelated nature of the return profile of life settlements isn’t the only benefit that the industry could use in its sales pitch, according to Alejandra Limones, Partner at Demeter Capital. Whilst the ESG topic has taken something of a back seat in recent months to the broader macroeconomic climate – at least, in terms of column inches – many investors are still interested in exploring opportunities that support their own ESG requirements, and she says that communicating the social benefit is something the life settlement market could be better at.
“Correlation is the top bullet point. But ESG isn’t played up enough in this asset class – probably due to the negative press life settlements used to get. We need to focus on all the good that this product is doing to fund the retirement gap in the US, and the various social benefits of it. And I think for the big pension funds that are looking at impact investing, this should be a big opportunity and selling point for us and we should focus on publicising that,” she said.
The ‘negative press’ issue that the life settlement industry has received in the past is less of a barrier for managers looking to secure an allocation than it used to be, but there are other challenges that were born many years ago that the industry is still paying off. According to Bill Corry, Founder at Corry Capital, it’s important that the space acknowledges that expectation setting could have been better.
“Sometimes I hear stories of disappointment from investors who have invested in the asset class in the past, not just because the returns had been over promised, but also because cash flows weren’t what they were hoping. I think it’s important for both managers and investors to understand the past to have a better conversation about what it is you’re trying to achieve,” he said.
A recent good news story in the space came in the summer, when trade publication The Life Settlement Report, part of The Deal published its annual secondary market provider league tables, which showed that around $4.5bn of face value transacted in 2022, a return to growth for the space after a retraction in 2021. Overall, the secondary market has grown four-fold in the past decade or so, from just $1.1bn in 2013.
There is no publicly available data for the tertiary market, however. But it’s generally accepted that the space is much larger than the secondary market, as life settlement portfolios contain multiple policies, often many years old, so the sheer number of policies transacted each year is naturally higher than the secondary market, which consists only of new settled policies. Still, while the secondary market is growing, that’s not the case in the tertiary space.
“If I look at opportunities this year in the tertiary market compared to last year, we probably see a 25% decrease of the paper auctions, whether that’s liquidity in open ended funds, or funds coming to end of life, or bankruptcy cases. That tells me that buyers and sellers are not quite meeting at the current price expectations,” said Limones. “Buyers would like to see a higher yield and sellers are maybe not willing to sell their paper at the current demand. That points to illiquidity and it only takes a couple hundred basis points correction to erode and to get the new capital coming in.”
Whether the pull back in the tertiary market continues also remains to be seen. But these deals are still moving existing policies around different investors. To truly grow, there needs to be more activity in the secondary market, and life settlements participants will have to wait another nine months or so to see if the 2022 upturn in the secondary market continues. But overall, Corry says that the life settlement market is in a good place.
“The opportunity is significant. From a capital raising perspective, it’s never looked better, despite higher interest rates. Supply is a challenge, but it always has been. A lot of people don’t know a great deal about life settlements, including institutional investors. This makes the opportunity so encouraging.”
