Company Profiles

EXCLUSIVE INTERVIEW: Opening Up The Private Credit World With BroadRiver Asset Management

Tom Burroughes, Group Editor, July 17, 2015

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Family Wealth Report recently spoke to a firm that says it delves more deeply than almost all of its peers into niche areas of the fixed income market, such as private credit, and it acts on behalf of clients such as family offices.

The world of fixed income investing is in flux. The trauma of 2008 hasn’t yet fully dissipated – liquidity in some debt markets is not back at pre-crisis levels; bank lending has, in different degrees and places, shrunk as new capital regulations and a need to shrink leverage have taken its toll.

On the other hand, requirements for capital – and pools of available capital – mean that market participants are trying to figure out how to set up deals and earn yield – a vital consideration in today’s low-yield world. One such organization operating in a niche area of fixed income markets is BroadRiver Asset Management, a firm headquartered in New York City’s iconic Empire State Building. This publication recently spoke to Andrew Plevin, co-chief executive and founding principal, about the firm.

What was the main reason for setting it up?

As natural skeptics, we saw an untapped opportunity in the market towards the tail-end of the 1990s, as the dot-com bubble was rapidly growing, to invest in assets that were more secure. We had an aversion to assets that involved predicting the future of financial markets and an orientation towards institutional clients.  We did not want to be part of an investment business that was fraught with risk. 

Through research, we uncovered an opportunity in the life insurance industry. With life settlements, we identified an emerging asset class that did not display erratic behavior, while at the same time offered compelling levels of return.

All along, we saw an investment that had very stable characteristics and felt really good about the concept and its potential. As a first step, we hired an actuary to determine how many life insurance policies we would need in order to minimize volatility in the portfolio. Fortunately for us, we found that the optimal number fell within the range that we could assemble, given the supply in the market and our investment criteria. Thus, our business was born.

Given our natural inclination not to participate in markets that are primarily based on guesses about the future, we preferred analytical asset classes where external information about what the future would hold was prevalent. We had found our niche and we ran with it. Life settlements was a counter-cultural choice, in that the investment was uncorrelated to the financial markets, yet turned on a risk that had a long history of study by both the private and the public sectors – i.e. longevity risk.  Longevity/mortality can be a very sensitive subject for people, but it is primarily a scientific question – not a financial one – which is an important distinction.

Building upon our initial focus, the firm has been expanding into other areas of private credit that are similarly uncorrelated to the markets, senior in credit position, and provide reliable sources of cash flow.  We’ve seen that with municipal tax receivables and short-term corporate receivables. We think that by investing in combinations of various private credit structures, sophisticated investors can build a fixed income portfolio – one might say a synthetic fixed income portfolio - delivering better returns at acceptable risks and comparing favorably to conventional fixed income alternatives.  

What does it do? What are its unique propositions?

We are alternative fixed income managers who offer investments that behave like bonds, but that do not sacrifice credit quality. 

Our Private Insurance Funds feature attractive yield, little correlation to the markets, and minimal volatility.

Life settlements provide an economic benefit to policy-holders by:

-- Exchanging their unwanted life insurance policies for proceeds much greater than that offered by the insurance companies’ cash surrender values.
-- Providing an aging population with liquidity for a widely-held asset that previously was difficult to monetize.
-- Our strategy is less exposed to external events as life cycles are predictable and largely unaffected by market movements. Our Private Insurance Funds feature attractive yield, predictable cash flow, little correlation to the markets, and minimal volatility.
-- Our strategy is less exposed to external events as life cycles are predictable and largely unaffected by market movements. 

Our Tax Receivable Funds have a shorter duration, while also having cash flows largely uncorrelated to the markets and having a senior credit position. Municipal tax receivables provide needed liquidity to municipalities that need to fund their operations (police, fire, schools, roads, parks) and assist them in collecting revenue that otherwise would be hard to achieve.

Experience has shown that payment of tax receivables has low correlation to the economic cycle. For our investors, tax receivables provide a highly attractive yield, especially in comparison to today’s markets, and a senior credit position that provides strong protection of principal. Our Corporate Receivables Funds have the shortest duration, generally less than six months, and provide a compelling place to park idle cash while still earning a return above that typically found in money market funds and certificates of deposit. 

You talk about the private debt market and the fact that such markets are under-appreciated and have characteristics that will suit family offices, and similar entities. Can you go into a bit more detail about this?

The private debt/credit assets we participate in have the potential to produce predictable, low-volatility, low-risk cash flows for a portfolio of assets that are carefully modeled and underwritten. Constructing stable portfolios usually involves large numbers of self-amortizing assets, which are largely impervious to exogenous events. 

Investors with longer investment horizons – like family offices – do well to acquire non-correlated, low-risk, low-volatility cash flows and above-market yields in exchange for assets that don’t offer daily marketability.

What are the qualities of the private debt markets? Please set out a few concrete examples. How do they work? What is the key difference with conventional bond markets (aside from obvious private point)?

Private debt markets encompass a range of investments and strategies.  Key segments include mezzanine debt, bank loans, distressed debt and a new area, gaining a lot of attention, known as peer-to-peer lending.

These assets often do not have deep, liquid secondary markets, so typically strategies that focus on buy and hold have advantages over those that focus on trading.  In general, private debt is not available in publicly-traded markets or through exchanges.  For family offices, it usually is accessed via asset managers who specialize in one or more niches.  Accordingly, manager selection is a critical component to the investment decision.

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