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PE Firms Vie To Bid For $6B KBC Life Settlement Assets

Max Frumes reports that Apollo Global Management and other large buyout firms are looking to score big returns in an auction for the life settlement portfolio of Belgian bank KBC. Apollo is raising a $525 million fund expressly to invest in one portfolio-a fact revealed by an Oregon state pension fund. Apollo's vehicle aims to invest specifically in KBC's portfolio, worth around $6 billion, according to industry sources. Besides Apollo, TPG, KKR, Cerberus and Fortress Investment are also looking to invest in distressed life settlement assets that may include the KBC portfolio, according to sources in the life settlements industry as well as sources involved in the auction.

Apollo Global Management LLC and other large private equity firms are looking to score big returns in an auction for the life settlement portfolio of Belgian bank KBC Groep NV. Apollo's foray into life settlement policies became public when Oregon's state pension fund, the Oregon Investment Council, disclosed it was considering investing $100 million in Apollo's new fund late last month. The New York buyout firm is raising a $525 million fund, Apollo Financial Credit Investment I LP, created expressly to invest in one portfolio, according to OIC's disclosures Sept. 29, which included Apollo's entire prospectus on life settlement investing. Oregon has not finalized its $100 million commitment, according to council spokesman James Sinks.

Apollo's fund aims to invest specifically in KBC's portfolio, worth around $6 billion, according to multiple industry sources. Besides Apollo, TPG Capital, Kohlberg & Co. LLC, Cerberus Capital Management LP and Fortress Investment Group LLC are also looking to invest in distressed life settlement assets that may include the KBC portfolio, according to sources in the life settlements industry as well as sources involved in the auction. Representatives for TPG, Cerberus and Fortress declined to comment on the firms' intentions in this sector. Kohlberg did not respond to requests for comment. KBC spokesman Stef Leunens said KBC is looking to divest its life settlement portfolio, but has not decided on how best to do that.

A life settlement provider buys an individual's life insurance policy, assuming any premiums and pays out a lump sum or monthly payments in return for receiving the payout when the individual dies. The size of the market is uncertain, but according to Apollo's prospectus, Credit Suisse Group estimates that the life settlement market will exceed $160 billion by 2016.

In 2008, there were $11.7 billion in life settlements and $12.2 billion in 2007, according to Conning & Co., an asset-management firm that tracks life settlement data. Industry participants are eager for private equity to invest in life settlements, which are illiquid and have oftentimes been contentious, sources said.

"It's very positive. The industry would be fortunate to see investments from private equity," Steve Shapiro said. Shapiro, who previously worked in private equity at firms including Blackstone Group LP, is chief executive of Q Capital Strategies LLC, a New York-based life settlement provider. Elliot Bertram, a portfolio manager at Madison Strategic Partners, said that he has been approached by several private equity firms suddenly interested in investing in a life settlement portfolio. "Over the last six to nine months PE firms are now taking a very serious look at the asset," he said. This is because past investors in life settlements had short-term capital investing in a long-term asset. "It's a long, stable return for a long-term investment," said Bertram, whose boutique firm underwrites investments in life settlements, often partnering with them to invest in large portfolios of the asset.

There are risks to investing in distressed life settlement portfolios that might make them less valuable than standard life settlements, according to Scott Sanders, director of capital markets for Wm. Page & Associates Inc. Portfolios could wind up including policies challenged in court by the original carriers, or the life expectancies could be longer than previously calculated, Sanders said. A better investment might be in plain vanilla policies, he added. "You can buy newly originated, fresh, clean policies versus taking the risk and brain damage of investing in something you are still unsure about," Sanders said. Wm. Page is a life settlement provider that also aggregates its portfolios for outside investors.

There are several ways to take advantage of so-called distress in life settlements. One way would be to buy highly discounted contracts that are more contentious because they were life insurance policies made with the intention of being sold as life settlements. This is what comprises most of the KBC portfolio, according to sources familiar with its contents. In another opportunity, investors can buy assets at a discount because the original life policyholders are not dying quick enough to pay the life settlement investor. In 2008 there was a significant lengthening of life expectancies by major underwriters, according to Apollo's prospectus, quoting AVS Underwriting LLC and 21st Services LLC. Moreover, there is a chance to make money off of lending to life settlement investors who just need to get past the hump of that additional extended life expectancy.

Fortress has made these types of loans to life settlement investors, according to two sources familiar with the matter. Fortress' investments in life settlements would come not from its $14 billion buyout business, but in its $13 billion credit investment or structured investment business, according to a person familiar with Fortress' investment structures. Apollo put together a dedicated team to lead the effort, most of which came from Swiss Re, the global reinsurance giant. Two former Swiss Re employees affiliated with this effort are Jamshid Ehsani and Bill Sullivan. The team listed on OIC's report also includes one of Apollo's co-founders and managing directors, billionaire Marc Rowan.

Included in the discussion of OIC's investment in Apollo was Sundeep Rana, a senior vice president at asset advisory firm Pacific Corporate Group, according to OIC's disclosures. Rana said PCG is still in the process of looking at the OIC investment, but declined to specify his role. KBC held an auction for 111 policies worth $784.1 million at the end of April, according to an announcement of the auction handled by Freeman & Co. LLC, a New York-based M&A advisory. Freeman managing director Gagan Sawhney said that Macquarie Group Ltd. was the investment bank running the current auction for KBC. Macquarie did not respond to calls to confirm its participation.

There is also a question of an exit for this type of investment, according to David Rawson-Mackenzie, a managing director of Centurion Group Ltd., an asset manager in Europe with funds that invest in life settlements. "If it's buy and hold, then they've got a pretty good investment," he said. But, according to Rawson-Mackenzie, an investor might hold the portfolio for 20 years if it is illiquid, not the type of investment timeline for a private equity firm. For returns, Apollo is looking for midteens to a 20% internal rate of return, according to the prospectus.


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