Like most asset classes in the alternative credit market, the life settlement industry has had an interesting few years as macroeconomic changes have impacted fundraising and deal flow. Greg Winterton spoke to Anna Bailey, Managing Partner at asset manager Chestnut Capital Management, to get her thoughts on the current state of the space.
GW: Anna, let’s start with something general. What’s your view of the impact of the macroeconomic environment of the past few years on the life settlement market – on both fundraising and deal flow?
AB: The market is still steadily growing – not quite the way I think most participants in the market had anticipated, but there is growth year over year. In terms of deal flow, the main observation is that it has become a buyers’ market again and yields are going up because of the higher interest rate regime. Also, fund managers seem to be holding on to cash as the impact of rising rates makes it more difficult to get lending that makes sense – and they can still achieve the yields they have promised investors. With fundraising, I see more pension funds entering the market – despite the better yields on liquid credit, investors are increasingly interested in alternatives that provide higher yields.
GW: You penned a guest article for Life Risk News in June last year that discussed the rise in activity in smaller face value policies. Is that something that you’re still seeing, and does it still represent a medium to long term opportunity?
AB: Yes, this is a trend we are still seeing and some fund managers who traditionally purchased only large face are widening their parameters and buying policies with less than $1m in net death benefit (NDB). But I don’t know that the market will support any policies with an NDB of less than $100k though because the cost economics just don’t work.
GW: Related to the previous question – what’s your view on the increasing influence of the direct-to-consumer channel in the secondary market? Does where the policy comes from have much of an impact on your portfolio construction?
AB: I think the direct-to-consumer models are continuing to grow and I appreciate the education aspect of it. There are still many consumers who don’t know that they can sell their life insurance policy. With regards to portfolio construction, it doesn’t much matter whether the deal flow comes from the direct to consumer channel or the intermediated channel. What’s most important is that the origination is done well, and that it’s compliant – no cutting corners – and the insureds are cooperative.
GW: Many in the life settlement market comment on what they perceive as an awareness challenge among seniors. But from your perspective as an asset manager, what about the awareness at the end investor level? Is that improving – or not?
AB: I think investor awareness is growing. That’s a combination of an increased appetite for alternatives generally, as I mentioned earlier, which has led investors to our space as one option that they might consider, but also a greater awareness of life settlements more generally. I definitely don’t think that we are considered the ‘Wild West’ any longer but that doesn’t mean that there aren’t challenges that we face, but those challenges competition-based, as there are many different types of alternative investments available now. But I also think that speaks to the maturity of our industry; we’re often a serious consideration for an allocation now and a mature asset class should expect competitive pressures.
GW: Lastly, Anna, assume that there are investors reading this that are less or unfamiliar with the life settlement asset class. What’s your number one recommendation when it comes to the due diligence that they conduct on asset managers?
AB: My main recommendation would be to take as much time as you can to understand the nuances of the underlying asset and the specific drivers of return of it because they’re not the same as many other financial assets. For example, mortality, which is one of the fundamental pillars of our market doesn’t shift daily – sometimes, it’s not even yearly. Having a good grasp on that is key; success in our market is a marathon, not a sprint.
Anna Bailey is Managing Partner at Chestnut Capital Management