Biometric assets: The dynamics in the tertiary market have changed

During this  year we reviewed more than 5 bln USD of face value in life settlements portfolios. We have represented several bidders in various auction processes, and the trends are clear:

  •  Investors are getting increasingly comfortable with the issues surrounding the legal risk. Previously dubious quality paper has become acceptable. While two or three years ago Beneficial Interest paper drew few, if any bids, with the market having seen several more years of litigation and court decisions. Beneficial Interest paper has become acceptable to many more investors, as long as the portfolios represent at least 50 to 70 lives and thus offer some diversification.
  •  More marginal portfolios with less than 40 insured are still coming to market – mainly broker and provider inventory positions.
  •  More substantial, aged portfolios of good origination quality have been withdrawn from the market – the main bank portfolios, with the exception of the well-publicized Mizuho portfolio – have not been offered out any more, and are presumably now so well cash-flowing that they will not see the light of the market anymore. Some of these portfolios sit with a bank-internal manager who will now get a good bonus for sitting on the cash flows.
  •  The universe of bidders has increased substantially. More than oncethis year we represented first time investors out of the private equity / hedge fund world for 8-figure bids. No surprise there – mortgage paper has rallied hard, and where do investors want to pick up yields?
  •  Established bidders have cleaned up as much paper as they could find, and even taken on messy situations where retail investors and the press are involved.
  •  The universe of auctioneers has also increased, and life settlements brokers are trying to hold onto the more marginal portfolio auctions.
  •    Expect 2013 to have less portfolio auction activity than 2012.
  •    Expect a continued disconnect between the secondary and tertiary market with too many players in the secondary market not being able to shake off history and suddenly become institutionally acceptable.
  •   Expect established portfolios to become more expensive and be rounded off at the edges.