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August 23, 2011 at 05:00 AM
In the last couple of years, U.S. life settlement funds have made significant inroads into the U.K. Last year, the U.K.’s securities regulator, the Financial Services Authority (FSA), began approving life settlement funds—opening life settlements to U.K. investors.
In the U.S., life settlements expanded rapidly in the early 2000s from less than $1 billion in 1999 to about $12 billion (face value) in 2008. Life settlements then contracted between 2008 and 2010 to about $7 billion. Although projection from before the financial crisis estimated that life settlements would increase to between $90 and $140 billion in face amount settled by 2016, it’s looking like those projections were far too ambitious.
As the market for U.S. life settlement policies expands into the U.K., Arbuthnot Latham—a U.K. investment bank—is cautioning investors that some life settlement funds may not be as they appear. In its Alternative Investments Thematic of July, Arbuthnot Latham provides a due-diligence primer for investment professionals evaluating life settlement funds. The report lists four primary concerns:
1. Funds over-promising on liquidity
According to the investment bank, “life settlement managers are offering short term (often quarterly) liquidity but allocating investors’ capital into a long-term and illiquid asset.” Despite the promise of liquidity, funds may halt redemptions or may be forced to borrow to meet redemptions.
When examining a life settlement fund, determine whether the fund can keep its liquidity promises without compromising the stability of the fund.
2. Lack of Valuation Method Transparency
Another significant issue with some life settlement funds is their lack of valuation method transparency. According to the report, many fund managers contacted by the bank were reluctant, or even refused, to discuss their valuation methodologies. A lack of transparency is compounded when valuations are not verified by a third party. “In our minds, this lack of transparency creates a conflict of interest and is by no means independent,” according to Arbuthnot Latham.
When examining a life settlement fund, determine whether the fund is forthcoming with its valuation method and whether valuations are subject to third-party verification.
3. Increased Life Expectancy
