Nick Eddery-Joel says the capital drought has had an impact on the run-off sector
The recent dislocation in the financial markets has had an effect on the run-off sector, not just in terms of capital availability but also risk and return expectations.
A number of the potential investor firms have withdrawn from the sector, but, as the interest in recent transactions has shown, there are still sufficient sources of capital available to make it a competitive market. It is still too early to tell whether the recent opinion on the Scottish Lion scheme will have turned away other run-off investors for good, but it must have an influence on those who thought run-off investments were a short- to medium term play.
The availability of debt as a leverage tool has also changed. The increased cost of debt – together with the uncertainty as to its actual availability – makes any kind of leverage structure uncertain. This puts equity investors closer to the fire in terms of the risk and return by obviating the opportunity of enhancing the pure equity return.
Undoubtedly some investors will have identified better returns in other asset classes and either switched attention to those classes or are looking for commensurately higher returns in run-off transactions.
The other area of uncertainty stems from the sell side. Given the above issues and general prevailing uncertainty, it is perhaps understandable that, in the main, potential vendors may not be looking to dispose of liabilities at this time. But we still see opportunities arising in the future – together with new challenges – that will serve to encourage the disposal of legacy portfolios.
Nick Eddery-Joel is chief operating officer of Afinia