United States financial services firm Coventry and life settlement asset manager SL Investment Management have joined forces to create a new life settlement fund for the institutional market.
Under the partnership, Coventry will supply the life policies, which it buys directly from the holders through its network of financial planners and accountants.
SL Investment Management has designed the product, called the LongView Beta Fund, and will manage the portfolio.
"We thought there wasn't really an institutional-type product available that investors are fully comfortable with," SL Investment Management investment director Patrick McAdams said.
McAdams was in Australia recently to speak with potential investors and the fund will have its first closing when it reaches US$50 million, which is expected to be raised by October.
The fund will have a maximum size of US$1 billion and consist of a minimum 1500 policies. It aims for net returns of between 9 per cent and 11 per cent a year.
Under a life settlement the policyholder will sell a life insurance policy to a third party for a one-time cash payment.
The buyer then becomes the beneficiary of the policy and will receive the payment when the policyholder dies.
Often life policies are sold when the personal circumstances of the holder change or when the beneficiaries in the policy are no longer alive.
Because policyholders can live much longer than expected, the timing of returns can be uncertain and in the past this has led to volatile results.
"In the late '80s it arose from very rich people who needed access to money, but then it was a very volatile product," McAdams said.
Some previous products have also been quite complex, making it hard for investors to understand the risks involved.
But because the two companies together had control over the whole process from buying policies to managing the fund in which they were bundled, the new fund was relatively simple, McAdams said.
"We didn't want to do anything complex, because for most investors it will be their first-time experience. We keep it quite conservative," he said.
However, investors should bear in mind the product was relatively illiquid, he said.
Policies cannot easily be traded as it takes on average three to four months to sell a policy, and investors should have a seven to 10-year time frame when participating in the fund, making it more suitable for superannuation funds.
"The products are relatively illiquid. You can't trade a life settlement on a Bloomberg," McAdams said.
SL Investment Management currently has seven life settlement funds and about US$1.5 billion in funds under management.
Mercer published a report in April in which it predicted an increase in interest for the asset class from sophisticated investors in the Asia-Pacific region.
Mercer said the products had a number of advantages, including portfolio diversification, but investors should also be aware of the risks.
"Investors need to be cognisant that with this type of strategy they are bearing longevity risk - the potential that people will live longer than expected," Mercer alternatives boutique senior associate Ryan Bisch said at the time.
"Understanding the intricacies of this risk is critical and for many institutional investors already exposed to the risk of mortality improvement, such as defined benefit pension schemes, life settlements may not in fact be appropriate," Bisch said.
