15/3/2010
By Sophie Baker
Those considering an investment into life settlement funds must ask ten questions of their product providers in their diligence processes to ensure a sound choice of manager, says SL Investment Management.
The product provider, which offers these funds outside the US, is urging potential investors in life settlement funds to ask these questions following the Financial Services Authority's (FSA) comments on the secondary life market at the recent European Life Settlement Association (ELSA) conference. However, SL Investments said the regulator neglected to mention much-needed detail for investors, given rising interest in these funds which can provide low correlated, steady returns.
"We agree that the market needs a shakeout but investors need detail now to make informed divisions," Jeremy Brettell, chief executive at SL Investments, said. "Responsible managers should have no qualms about offering bespoke and transparent help and support to investors. This is our approach and it is the honest and diligent approach to take."
Investors should ask if the manager or the fund is regulated, the level of due diligence that the manager performs at acquisition, and how the policies are valued, since there is no consistent approach to the valuation of life settlement policies in the market, giving a wide range of reported performances.
Remuneration of parties, fee calculation, approaches to liquidity provision in funds and the management of mortality and longevity are further issues for consideration. Approaches to the operational risk within life settlements is another issue, as the legislation, licensing and practical realities of running a life settlement fund means that numerous third parties are involved.
Finally, the management of conflicts of interest and whether the fund is tax efficient must be looked at by any potential investor. Regarding tax, SL Investments said the 2009 issued IRS guidance on taxation of life settlement transactions brought much-needed clarity to the market, but created a number of problems for funds and companies that help these policies in countries that did not have a suitable tax treaty with the US. Some funds are yet to solve these issues.
