Markets And Buyers
Tertiary transactions are a major part of any life settlement asset manager’s acquisition strategy. The “Tertiary Market” consists of the sale of a life settlement asset that has already gone through the origination process, normally called the “Secondary Market”. For a multitude of reasons, asset managers both buy and sell on the tertiary market.
In 2015,tertiary transactions were numerous and showed market participants that large amounts of capital have entered the space, initiating the compression of potential yields. These points were highlighted when Vida purchased the Amazon portfolio during a highly competitive bidding process. While that transaction was through a publicized auction process hosted by Houlihan Lockey, 2015 had plenty of transactions through other channels. On the heels of such a strong year for the tertiary market, many portfolios have come, and are continuing to come, to market. This has resulted in the tertiary market receiving a premium over the secondary market from a pricing perspective due to the increase in institutional capital and desire to deploy that capital quickly and efficiently. These buyers are willing to buy at lower yields in exchange for diversified, leveragable pools of life settlements to create their base on which they will slowly add additional policies.
Opportunistic Sales: This is a main driver for many of the transactions that have come to market in 2016. Portfolio owners see where policies are currently trading,as well as the high level of capital in the market, and want to take advantage of this opportunity.
Previously High Risk Policies: Due to improving regulations and case law, what was once high risk is now considered low risk. In the past many investors would buy “Brooklyn” policies or Premium Finance and Beneficial Interest policies at steep discounts (north of 20%). With the improvements in the market, these policies are no longer seen as being high risk. This allows the sellers to receive very profitable offers compared to their carrying cost. Many of these policies were purchased by smaller groups or individual investors and are now entering the market in small blocks.
European Market: Europe, and specifically Germany, was an early entrant into the life settlement space. Both Banks and Funds in Europe purchased and lent in the life settlement space in the early 2000s. Funds that survived have reached the end of their closed end structure and are now selling the tail of their investment. An example can be seen with Dr. Peters selling their reaming portfolio in early 2016. Additionally, Banks participating in lending , such as West LP (now Portigon), have recently foreclosed on many portfolios. We expect these portfolios will slowly start coming to market over the next few years.
Market Trading: There is always a large amount of trading between market participants. Whether a fund is “proving liquidity” to their investors by selling a small percentage of their portfolio each year, or selling a policy to handle redemption requests, there are many drivers of trading. Additionally, there are transactions associated with rebalancing portfolios when a fund acquires a large block and needs to lighten exposure, for example on a specific life or life insurer.
Author Adam Meltzer is the Vice President of Magna Life Settlements, and develops and manages all institutional buyers who acquired files from the provider. Before joining the acquisition side of life settlements, Adam held various positions in life insurance and life settlement brokerage space. Adam holds a B.A. in business from Southwestern University in Georgetown, Texas and his MBA from St. Edwards University Austin, Texas.