Syndicate investing simply describes a situation in which there are multiple parties to the deal.  In many cases, the syndication is done in order to ensure that the minimum required capital that the company is trying to raise is met.  In this particularly tough market environment, you will find that far fewer deals get done where there is only one bank or one investor. As a company looking for funding, syndications allow access to a bigger pool of opportunities. As an investor looking to be a part of a syndicated deal, there are various factors that may make such an investment a better alternative to being a sole investor in a deal.

As the timeless proverb goes it’s usually not a good idea to put all your eggs in one basket.  The case certainly applies to investments in particular.  Syndicated deals offer investors an opportunity to invest without having to risk all of their capital.  While the total capital needed by the company may total $10 million dollars, PIPE investors with smaller amounts of capital may still be able to get in on the deal at much smaller amounts.  The trade off under this situation is the fact that the smaller investors generally are not able to drive the deal terms.  While it is the responsibility of all investors to conduct their own due diligence, it is not uncommon for many of the smaller investors, particularly individuals, to rely solely on the work that’s done by the lead investor.

While syndications offer safety in numbers, it also creates other potential risks.  One critical issue in particular is the concept of overhang.  In most PIPE deals, there is a projected timeline in which investors have the ability to exit out of their position.  Since these PIPE deals involve publicly traded companies, there is a real concern that if all investors try to exit at the same time, the company’s stock price will be negatively driven down.  This potential adverse effect is what we deem as overhang risk.  Such risk is can only be minimized by investing with only groups that you are familiar with.  Unless you are the sole investor, there are many variables that are outside your control. Investors should invest only within the comfort of their risk reward box.

The simple answer is NO.. but that does not mean that you have to assume large amounts of risk to get good returns.  What is important is that you identify what the risks are and have specific strategies to mitigate them or otherwise protect your investment capital.

If you are satisfied with low single digit returns then muni’s are probably right for you and I would not waste much time reading further. We are alternative asset specialists and provide strategies that have the potential for double digit returns and we spend a lot of time managing risks.

The fact is that the best returns can be found where they always have been i.e investing in corporations or projects that are creating new value. Whether that be a small company bringing a new product to market, a new clean energy project, or any of the literally millions of value creating opportunities around the globe. If you want returns you need to invest in strong new projects or companies.  Clearly, anything new has risk of failure for any of a million reasons. But do you just have to accept the risk of loss to get these returns?

Absolutely not! Sophisticated investors are adding layers of protection to the deals they do. This is done by “wrapping” the deal with a non-correlated, secure type asset that can repay the principal invested even if the project fails.

Leading investors and banks in Europe are looking to life settlements to fill this roll. Life settlements are one of the most highly uncorrelated assets available, returns are simply not impacted by interest rates, market or political trends. And given the right structure they provide a predictable cash flow. They are not very liquid and have a long term horizon but they are an ideal asset class to protect principal invested in similarly long term projects like real estate, energy, etc.

I would encourage any investor who would like to invest in private equity or project finance to spend time understanding the value that life settlements can play in reducing the risk while maintaining the ability to get yield. Unfortunately many investors seem to prefer to keep their head down and not take the time to understand the opportunity they offer.

There is absolutely no simple answer to this question but I can give you some guidelines. ANYONE who tells you they can give you a firm valuation without obtaining medical information, policy information and trust information if it is held in a trust is simply lying to you. You can get a rough idea but pricing a life settlement involves many variables. That said you can get a ballpark and understanding the basics will help you evaluate whether your chosen broker knows his knee from his elbow.

The basic valuation equation

An investor’s return on a life settlement is the death benefit (DB), a clearly defined number. This is one of the things that is unusual and attractive about life settlements to investors…they know how much they will get paid. Obviously the investor, in order to make money has to pay less than the death benefit. His costs are the annual premium (P) to “maturity” (the politically correct term referring to the death of the insured) and of course how much he has to pay the owner of the policy to acquire it (A). The annual premium (P) is another defined number, the life insurance carrier will provide an illustration of how much premium is needed every year to keep the policy in-force. The unknown in the valuation equation is life expectancy (LE) of the insured. To get an estimate of this an investor will need a life expectancy report from a medical underwriter, several companies specialize in this area. So an investor is able to calculate the likely total cost of premiums on his investment. By subtracting that from the death benefit he knows how much absolute profit ($) he potentially has in the deal and can decide how much he can afford to pay the owner to acquire the policy.

$ = DB – ((P*LE) + A)

Determining how much he can afford to pay the seller means the investor must calculate the Net Present Value of the investment. That is how much is he willing to pay today to acquire (A) to receive his profit ($) in the future. To do this the investor must decide on a rate of return or yield he expects to get on his capital to buy an asset like a life settlement. E.g If an investor hopes to earn $1 on an asset in 10 years he might pay you 15c for it today. Typically investors in this space expect to make quite high yields (15% annualized rate of return is not uncommon). That may seem quite high but the investor has substantial risk of having to pay much more in premium expense as life expectancies are quite inaccurate.

The Use of Statistics, Probabilistic valuation

Life expectancies are very inaccurate at predicting an actual point in time. In fact life expectancies are actually not a date but a bell curve based on the mortality rate of a large number of people. The life expectancy report basically tries to answer the question. If you had 1000 people who looked like the insured how many are likely to have died in the first year, the second year, and so on to create a bell curve that may spread out over decades. The LE investors use is typically the 50^th percentile or the year in which the bell curve indicates 500 deaths will have occurred.

Investors use a statistical technique that essentially combines the probabilities of death in each year over the whole curve to value a policy. The most common tool for doing this is a software program from Model Actuarial Pricing Systems or MAPS. This is often wrongly called “Milliman valuation software” after the consulting company who originally wrote the software. This software combines the life expectancy curves, calculates premium expenses and allows the investor to enter their desired rate of return to calculate the net present value of the policy.

Non-Financial Valuation factors

As with all investments the pure numbers are only one part of determining the market value of a policy. Investors will consider many other variables some intrinsic to the policy such as the kind of policy it is (Universal life, second to die, whole life) or even the State it was issued in or credit rating of the carrier. Other factors may be completely unrelated to the policy, such as an investor may need your specific type of policy to meet the diversity criteria he has for his pool of policies. Many variables will have an impact on an investor’s evaluation of risk on the policy and each investor creates their own unique profile of policies they are interested in and those they are less interested in. Some investors may want to buy only small face policies others don’t want to buy policies with less than $1M face.

Getting the best Price for Your Settlement

While there is science to valuing a life settlement, your ultimate price will come down to the skill and experience of the broker at negotiating with as many interested investors as possible. As with all negotiations knowledge is power, so make sure that your broker has experience and the valuation tools like MAPS software (often called Milliman life settlement software, incorrectly).