A structure to entice family wealth

As fund managers seek to tap into the potentially huge retail investor channel, insurance products may offer at least some of the answer.

Make no mistake: family offices see a lot to like in private debt. The reasons for that include higher returns than fixed income and steady yield. What they like rather less, however, is being charged high rates of tax on that income, which in places such as California and New York can be 50 percent or more. And that’s why advisers to family offices, keen to steer them towards what they see as a good thing in private debt, are increasingly talking to them about private placement life insurance.

PPLI is a type of life insurance policy that allows investors to build significant cashflows over time on a tax deferred basis. Through the PPLI structure, investors are able to invest through limited partnerships in the likes of private equity, hedge funds and private debt at low cost. Thus far, however, such structures are only scratching the surface of their potential.

“Partly this is because they’re complex to set up,” says one family officer adviser we spoke with. “But it’s also because the conversation can be quite difficult. Clients hear about things like insurance and annuities and whereas for us it’s a strategy, they think they’re being sold something and it puts them off.”

The same adviser said what family offices are seeking to achieve is “after tax alpha”, and many think insurance products have the potential to deliver this. This is significant as, even though diversification is as important to family offices as any other type of investor (or should be), they also tend to have a rather more aggressive view of risk-return than institutions typically do and therefore up to now, have found a more natural home in private equity than private debt.

Put in a broader context, the hunt for investor-friendly structures is part of the push to tap into the potentially enormous retail market – a topical trend as many of the largest fund managers hand a rocket boost to their wealth management units, and one we explore in our cover story for the upcoming March issue. Keep an eye out!

Write to the author at andy.t@peimedia.com