Family Offices Open to Private Credit in Defensive Strategies
Family offices seem open to private credit in defensive strategies in a way that other investors are still to appreciate. All investors are searching for consistent returns within the defensive part of the portfolio.
In essence, they are more open to investing in a business that creates consistent, repeatable returns rather than depending on the traditional coupon from a bond.
John Swallow from Laureola has seen a great deal of the new business for the life settlements group coming from family offices in USA, Asia and now developing in Australia.
Fixed income investors look to bonds to share in a company's progress by buying their debt and waiting for the interest payments and then the repayment of the capital.
It's not working this century because of low interest rates, heavy government borrowing and now Covid-19 is disrupting markets and expectations on returns.
And these problems won't change - the yield on bonds is very low and interest rates need to rise to make new bond offerings more attractive. And if interest rates do rise, the capital value of trillions of dollars of existing bonds will fall.
Life settlements as an asset are non-correlated to markets. The life settlements sector - buying insurance policies off older Americans who no longer need the coverage.
Life settlements are one example of a business where an investor is sharing immediately in the returns being generated as the life policies purchased come to maturity and insurance companies pay cash to the fund. And it is highly regulated and seen as an ESG outcome by regulators.
This is about investing in a business which is producing cash flow - not simply buying bonds in a company and hoping that the coupons are paid on time and capital is returned.
A well-managed life settlement fund can be expected to generate 7-11% pa returns (in AUD terms). Such levels of returns can be expected regardless of inflation scenarios. The returns in life settlements are stable and consistent over the years. Given the level of returns, life settlements can be relied upon as a bedrock in a portfolio. The only inflationary scenario where life settlements might struggle would be a hyper-inflationary one (like the Weimar Republic in the 1920s).
Written By Tony Bremness
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