David Humphreys, the man who spearheaded HSBC's successful Mandatory Provident Fund business in Hong Kong before retiring last year, has co-founded an investment management firm specializing in alternative investments in the form of asset-backed securities (ABS) and collateralised debt obligations (CDOs). The firm, NewHaven Capital, is now marketing its first asset-backed bond to Asian institutional investors based on senior life insurance settlements.
The other co-founders include CEO Alistair McLeod, who has served as CEO at VIG Capital Management as well as at Emirates Bank International, Bank of America, HSBC and Alliance & Leicester Giro Bank; managing director Daryl Evans from VIG Group; and executive director Ben Daniel, who had set up his own consulting firm Esone following a career in corporate finance.
NewHaven is teaming up with Seabury Advisors, a California-based investment bank, to acquire the legal rights to life insurance policies in the United States, usually from individuals that are at a highly advanced age and would like an immediate cash payment in their final years, rather than see the life policy go to their estate after their death.
Separately, NewHaven is partnering with a Chinese securities company (which Humphreys wouldn't name) that sells CDOs on the mainland. CDOs are asset-backed securities on a diversified pool of financial assets such as bonds and loans across the risk spectrum, sold to insurance companies, pension funds, hedge funds and other institutions seeking higher returns.
The partnership would let NewHaven help the PRC firm sell its CDOs overseas, as well as help it get involved in NewHaven's senior life settlement business. Humphreys declined to discuss this aspect further, as the agreements with the partner are only at the verbal stage.
Humphreys notes that securitizing senior life settlements is a $100 billion industry in the US, with firms such as Berkshire Hathaway active in the market. But internationally it hasn't caught on, and Humphreys believes NewHaven may be the first manager to introduce this concept to many institutions in Asia.
He also clarifies that NewHaven will not be involved in a similar activity called viaticals, in which an investment firm buys life policies from individuals with serious diseases such as AIDS, but which is also a big industry in the US.
NewHaven offers life-policy holders a lump sum of cash for the rights to their policy. Then a special-purpose vehicle set up by Seabury in the state of Delaware issues a zero-coupon bond using the policy receivables to pay at maturity. NewHaven believes investors can achieve a compound annual return of 7% on a three-year structure, and up to 10.5% for an eight-year note. "This is quite useful for organizations like life insurance companies and pension funds that need to guarantee some form of return," Humphreys says.
The firm is now in the process of getting a rating for the bond, with the aim of winning a AA- credit rating from Moody's Investor Service.
The main risk for this kind of product is liquidity: there's no secondary market for asset-backed bonds. Investors wanting early redemption would require NewHaven to sell some of the underlying assets - and there is a large market for policies in the US.
NewHaven is presently in talks with four or five large Hong Kong-based institutions considering investing. Humphreys' next marketing stop is Japan. The firm hopes to launch its first senior life settlement ABS by the end of the year, with a minimum of $60 million raised.