Multiplicity Partners, a boutique Zurich-based investment firm that specialises in secondary opportunities and providing liquidity solutions to holders of private market funds and distressed assets, is targeting the insurance-linked securities (ILS) space and wants to offer a solution to those experiencing trapped ILS collateral.
Having been active in the secondary market for private fund and distressed assets since 2010, Multiplicity Partners has now been working with insurance-linked securities (ILS) market experts to develop a strategy focused on the acquisition of ILS fund side pockets.
As a specialist in valuing and acquiring illiquid and distressed assets, Multiplicity comes to ILS with a fresh view and says it is responding to the “strong surge of interest from investors to exit insurance-linked securities (ILS) funds through secondary sales.”
With somewhere around $8 billion to as much as $12 billion of ILS market capital still trapped in side pockets related to prior year catastrophe loss events, ILS funds have been actively looking for solutions to this over the last two years.
Few transactions are said to have taken place, with agreeing on a valuation of the distressed ILS asset found to be challenging.
But interest in helping ILS funds free themselves from trapped reinsurance and retrocession collateral has remained high, with a number of investors looking to the space and run-off specialists also exhibiting an appetite.
Multiplicity Partners notes that the side pocket and trapped capital issue in ILS funds is “causing a material dilution of investors‘ performance.”
The boutique investor aims to help ILS fund managers and investors to “redeploy capital more profitably elsewhere and get a fast and clean exit from legacy investments,” through entering into acquisitions for their side pockets.
Andres Hefti, Partner at Multiplicity explained, “The lacklustre performance of ILS funds over the past three years has led many institutional investors to revisit their allocation to this niche asset class. Many of the side pockets were created to segregate losses from the non-impaired assets. This is where we come in and provide innovative and effective liquidity solutions to ILS fund investors looking for a clean and quick exit.”
Pirmin Stutzer, Partner, added, “We recently started to expand our ILS capabilities by establishing a close network of seasoned insurance underwriters to assess and execute more complex ILS transactions. In the past, we mainly dealt with individual ILS investors that were looking to dispose the ILS side pockets to us. In addition, we are actively engaging with ILS fund managers to provide tender offers to investors or to acquire the underlying trust units to liquidate a side pocket.”
When losses threaten reinsurance or retrocession positions, ILS funds tend to side pocket the potentially impacted assets so as to protect their investors against any worsening of the position and to segregate the affected assets so investors can also enter their ILS funds without picking up any exposure to prior loss events.
But, given the long development time of some catastrophe events, it can take years for loss payments to manifest and be fully made, meaning the distressed reinsurance positions can remain a drag on ILS fund performance.
By exiting these positions, investors and fund managers can at least realise the loss associated with the reinsurance asset that has been side pocketed, enabling them to redeploy the remaining value retrieved from the sale and move forwards.
A secondary market in ILS positions requires robust valuation processes, as well as buyer and seller to meet and agree on a price for the sale.
That reaching agreement on the value embedded in trapped ILS assets remains the challenge to securing more secondary trades of side pocket positions. Multiplicity Partners is keen to see this activity grow and by putting itself out there as open to acquisitions, should stimulate increasing interest and perhaps activity in this much-needed part of the market.
The timing could be optimal for Multiplicity Partners as well, given ILS funds face further trapping of capital over the uncertainty related to potential losses faced from COVID-19 related business interruption.
The opportunity to acquire trapped ILS assets could expand as a result.