Structured Products on Innovative Alternative Investments

Transcription

1 / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / / Structured Products on Innovative Alternative Investments Jarl C. Smidt-Olsen Commerzbank AG 1 November 2006

2 Agenda 1] Alternative Investments 2] Private Equity 3] Life Settlements 4] PEX and Vis Vitalis Products 5] Questions 2

3 What are Alternative Investments? Aim to produce: Stable, above-benchmark benchmark returns (Alpha) Returns which are uncorrelated with traditional asset classes 3

4 Why use Alternative Investments? To Maximise ones Investment Potential Returns Efficient Frontier Standard Deviation 4

5 Types of Alternative Investments Enhanced Mutual Funds Daily / Weekly liquidity Volatility overlay Internal hedges Hedge & Fund-of of- Hedge Funds Leverage through Prime-broker Potential Double layer of fees Monthly / Quarterly liquidity Single or Multi-strategy 5 Investment Funds Non traditional strategies Redemption penalties Single layer of fees Liquidity depends on underlying assets Insurance Private Equity Asset-backed

6 Comparison of Alternative Investment Types Alpha Investment Funds Hedge & Fund-of of-hedge Funds Private Equity Life Settlements Beta Liquid Enhanced Mutual Funds Illiquid 6

7 Agenda 1] Alternative Investments 2] Private Equity 3] Life Settlements 4] PEX and Vis Vitalis Products 5] Questions 7

8 Private Equity PE means investing in non-public companies through privately negotiated transactions PE offers high returns, with low correlation to short-term term market moves Difficulties of Private Equity Investors must provide capital on request Undefined maturity typically years Very limited liquidity during life 8

9 Typical Private Equity J-CurveJ Harvest Period Investment Period Investor Cash Flows Years Capital Calls Distributions Cumulative Cash Flows 9

10 Principles of Private Equity Cross-Over Allows for immediate investment Invested funds are held in liquid asset, until a PE opportunity is identified Investment Period Hedge Funds Private Equity Harvest Period 10

11 Benefits of using a PE Cross-Over Fund Allows for diversification & strategic asset allocation across: PE Managers Vintages Sectors Geographic regions Allows better liquidity due to HF component Immediate exposure - no capital calls Flatter J-Curve J - as HF component will generate returns immediately 11

12 Agenda 1] Alternative Investments 2] Private Equity 3] Life Settlements 4] PEX and Vis Vitalis Products 5] Questions 12

13 Global Overview Trading in second-hand life insurance has taken place for 150+ years in London First recorded trade in the US took place in 1911 Major markets are: UK Germany USA 13

14 Reasons for purchasing Life Insurance Coverage of Partners and children Coverage of future expenses Funding of Inheritance Tax Key-man insurance 14

15 Reasons for selling ones Life Insurance Change in status of beneficiaries (eg divorce, death of dependents) All major expenses have been covered Needs to raise cash to fund new requirements (eg medical treatments, annuity purchase) Unable to meet future premium payments Reduction in Inheritance Tax liability Key executives have left the company or retired 15

16 What is a Life Settlement Contract? Existing US Life Insurance contract purchased in the secondary market Has defined Premium payments Has a defined Face Value Backed by a licensed Life Insurance company Insured is aged 65+ NOT to be confused with a Viatical Contract 16

17 Cash-flow Profile of a Life Settlement Contract Purchaser Must: Pay the purchase price of the policy to the seller Maintain the premium payments Collect the Face Value upon maturity Face Value +ve -ve Purchase Price Premium Payments Time =?? 17

18 18 Why does a Secondary Market exist? Holders have many reasons to sell: Activate income from an inactive asset Boosts future cashflow situation Insurance Company may not be best bid: Take Lapse Rates for granted & enjoyed a historical Monopsony May bid low (Surrender Value), based on book valuations NOT actuarial valuations Arbitrage Opportunity May not take into account updated medical records

19 Why Invest in Life Settlements? Potentially high returns as arbitrage is still open Returns are primarily linked to longevity uncorrelated with traditional assets Life Settlements are an ideal Alternative Investment 19

20 Growth Drivers of the US Market Number of Seniors (65+) is set to increase 3x faster than the general population over the next 25 years (US Census) Increased awareness of Fiduciary Duty by advisors 20

21 Growth of the US Secondary Market Annual Traded Face Value USD Billion Sources: Year : Bernstein Associates : Surrenda-link

22 Potential Size of the US Secondary Market Size of Secondary Market by 2030 has been forecast at $160Bn $160Bn Increase in Market Penetration $12.5Bn Current Source: Bernstein Research Call Demographics 22

23 Risks inherent in a Life Settlement Contract Primary Risks Maturity is unknown longevity risk Implicit credit risk to the Life Insurance Company Secondary Risks Requires cash-flow management Highly illiquid instrument 23

24 How contract IRR changes with Longevity Per Annum Return % 90.00% 80.00% 70.00% 60.00% Single TSLI Life Assured Age 80 LE 87 Months Purchased at 15% IRR Annual Premium 3% Probability % % 80.00% 50.00% 60.00% 40.00% 30.00% 40.00% 20.00% 10.00% 20.00% % 0.00% Actual Life Span (Months)

25 The Importance of Pooling Probaility of reaching LE x 150% 30.00% 25.00% 20.00% 40% of Portfolio Probability 15.00% 10.00% 5.00% 0.00% Number of Individuals in Portfolio 25

26 Cascade of Credit Risk protection NAIC NAIC monitors the capital base PURCHASE Rival firms often purchase the business to expand market share SENIORITY Life contracts rank senior to all other kinds of debt STATE Each US State has a Fund which will honour $2-300k of loss 26

27 Many benefits of pooling into a Fund Large number of insured will give a stable distribution profile. Diversification among Life Insurance Companies Access to a wider selection of policies Transparency of monthly valuations (FASB ruling) Cash-flow management is taken care of Gives the ability to analyze and quantify risks 27

28 The value of due diligence Ensure that there is a logical valuation method Ensure adequate cross checking by independent parties Ensure adherence to market best-practice Ensure avoidance of conflicts of interest Gives comfort on integrity of valuations 28

29 Agenda 1] Alternative Investments 2] Private Equity 3] Life Settlements 4] PEX and Vis Vitalis Products 5] Questions 29

30 Meeting the Investors Demands 30 Guaranteed Maturity Date 100% Participation in upside of the Fund Enhanced Liquidity Leveraged Exposure? Capital Protection? Annual income? Require a tailored payoff & risk profile All require non-recourse Leverage

31 Using Leverage to create the Products Only recourse is to the Fund shares Leverage provider takes the risk of a sharp drop in value Non-Recourse Leverage Non-Recourse Leverage Non-Recourse Leverage Zero Bond Fixed Coupon Stream Principal Protected Note High Income Certificate Turbo Certificate 31

32 Which Structures suit different investors? Conservative Investors Aggressive Investors Principal Protected Notes High Income Certificate Turbo Certificate Less Experience of Asset Class More Experience of Asset Class 32

33 PEX and Vis Vitalis Vis Vitalis Products on US Life Settlements PEX Products on Private Equity Cross-Over 33

34 PEX Note Private Equity Cross-Over 100% Principal Protection 100% Participation 9-year maturity Equity +ve -ve $100 $100 9 Years 34

35 Private Equity Cross-over over Fund Manager Typical Names - Carlyle - Permira - Thomas H Lee - Bridgepoint - Candover Private Equity Allocation = 46% Leading Private Equity Asset Managers Founded in 1996 $10Bn+ AUM Employ 140+ professionals globally 75.0% 7.0% 18.0% Buyout Venture Capital Special Situations 35

36 Vis Vitalis High Income Certificate Capital at risk 100% Participation 9-year maturity Enhanced liquidity High Coupons Guaranteed Coupons Equity +ve $9 $9 $9 $9 -ve $100 9 Years 36

37 Vis Vitalis 4x Turbo Certificate No Principal Protection 400% Participation 8-year maturity Equity +ve -ve $100 8 Years 37

38 Life Settlement Fund Managers Over $400m in Face Value under management in Life Settlements One of the largest open-ended ended fund managers Regulated Assets Details NO Viaticals Current net IRR of 13% Average age of 77 Average LE of 10 years Insurer Details 94% from Aaa Insurers Largest allocation to any one insurer is 12% 38

39 Commerzbank creates Structured Products Duediligence on market and parties Structure product using derivatives Offer up to 4x Leverage to make 100% exposure Take liquidity & longevity risk 39

40 Contact us: Jarl C. Smidt-Olsen Head of Fund Derivatives Structuring Commerzbank Corporates & Markets, London Tel Ian Sosso Head of Asia Commerzbank Corporates & Markets, Hong-Kong Tel: