The expression ‘Private Assets’ relates to the family of unquoted (i.e. ‘private’) financial instruments (i.e. ‘assets’) in its broadest meaning. An essential branch of such Private Assets is made of private securities, which comprises both Private Equity and Private Bond.

Unquoted securities (notes, bonds and similar) representative of a debt instrument are known as ‘Private Bond’, while ‘Private Equity’ refers to equity securities (such as shares, equity interests, units and similar) issued by private entities. The issuers of such private securities are either private companies or private funds.

At first glance, the combination of life-insurance and Private Assets seems unlikely. Yet Baloise has made it a reality.

Our goal is indeed to provide access to high-return investments in the safest possible environment: by combining Private Assets and the Luxembourg unit-linked life-insurance contract, we manage to provide the best of both worlds to our policyholders.

Such an ambitious objective however required a significant adaptation of our traditional ways of thinking in terms of investment as well as of our usual practice. We had to put in place new investment practices to meet the specific characteristics of Private Assets that were unfamiliar to us and that seemed to conflict with our insurance obligations:

• long-term investment: the average period of investment into Private Assets is comprised between 5 and 7 years. Private Funds moreover usually provide in their documentation lock-up periods that may last until the term of the fund itself. Early redemptions at the initiative of the investor are not always allowed. If authorised, the requests have to be placed at specific times, according to a strict formal process. They are generally subject to ‘gates’ – where the fund only accepts early redemption requests up to a given amount (usually a percentage of the fund’s NAV at the considered redemption date) – and may trigger the application of penalties to the exiting investor;
• restricted transferability: the transfer of private securities (when possible according to the issuing documentation of the Private Asset) is generally reserved to ‘Eligible Investors’[1] as defined by the issuer and subject to a fastidious approval process by the issuer’s representative;
• commitments-capital calls mechanism of investment: Private Equity funds usually provide for such a progressive investment process, which is built on an ‘as-needed-basis’ by tranche payment mechanism. The initial investment represents only a small part of the total commitment taken by the investor. The fund will then proceed with capital calls, the time and the amount of which will depend on its investment agenda. The fund may proceed to any capital calls needed in the limit of the uncalled committed amount. When notified of a capital call, the investor has to comply with their initial commitment. At the level of the investor, such committed amounts are therefore effectively tied up for the duration of the investment;
• valuation mechanisms: depending on their location, their legal form and the regulations they are subject to private entities (mostly companies) may not be required to establish and publish regular certified financial statements. Even for those, which are normally subject to such accounting obligations, late filing is not an uncommon occurrence. The accurate valuation of the considered asset is therefore compromised, which results in an increased uncertainty at the level of the investor’s wealth. This is even more the case, when the communication streamline between said investor and the issuer is not firmly established.

We have therefore put in place a procedure focused on Private Assets, in order to cover the key periods of each private investment: on-boarding (compulsory due diligence, subscription process), day-to-day monitoring (management of capital calls, recallable distributions, valuation based on certified financial statements, etc) and exit (liquidation of the asset, request for a total surrender of the policy or realisation of the insured event).

Baloise has moreover articulated this procedure with its internal policy relating to eligible assets, in order to grant the possibility to invest into Private Assets through our life-insurance products in a frame as safe as possible.

As an illustration of the above, Baloise has limited the access to private investments through its policies to private securities. We also favour the investment in securities issued by private funds, as interactions with funds’ managers have proved smoother.

[1] We refer to Question 4 below for more information on this expression.

The actual termination date of a life-insurance policy is by essence unpredictable: a request for the total surrender of the policy or the insured event may occur at any time.

In such a situation, with traditional freely transferrable assets, we either simply request for the liquidation of the underlying portfolio before paying out the insurance provision due or we transfer the underlying assets to the policyholder (in case of surrender) or the designated beneficiaries of the policy (in case of realisation of the insured event).

When the underlying portfolio is however composed (even partly) of Private Assets, we face a more challenging situation. Due to the above-mentioned characteristics of private investments, it is unlikely that we can exit (even more in a swift manner) from the investment. It is moreover not certain that we will be able to transfer the position to the policyholder / beneficiaries: what if they are not ‘Eligible Investors’ in the meaning of the issuing documentation? We therefore need to thoroughly analyse the issuing documentation on these aspects in order to identify possible ways to solve those issues and comply, at the same time, with our obligations as an insurer.

As we are responsible for the provision of an updated valuation of the policy’s surrender value as of 31 December of each year to the policyholder, we also need to ascertain upfront that will be provided with regular – and at least annual - financial statements. In case of a private fund, we will check that its NAV is regularly computed and released to the investors (preset dates, at least once a year).

The above only provides an overview of the recurring issues that need to be addressed before investing into a Private Asset through a Baloise’s life-insurance policy. It is by no means an exhaustive list of all the controls realised during the unquoted investment due diligence that is performed upon each request for investment in a new Private Asset. As a matter of fact, depending on the actual content of the issuing documentation, additional issues that will have to be solved may arise.

Private Assets have been a clear and growing investment trend over the last 10 years. The interest for such assets bloomed, upon aftermath of the ‘subprimes crisis’, as the investors sought eagerly for more structured and high-return investment solutions. In the meanwhile, new regulations aiming at increasing the level of supervision of the fund industry, with a focus on alternative and private funds (e.g. AIFM directive, AML/KYC regulations) were enforced in order to address the market’s expectations for a safer financial environment.

Still, private investment is not primarily designed to be distributed to retail investors. The issuing documentation (e.g. private placement memorandum, limited partnership agreement) generally reserves the possibility to become a shareholder (or a bondholder) to experienced or sophisticated investors. Such potential investors are usually referred to as ‘Eligible Investors’, a definition of which is provided in the issuing documentation. It should be noted that such a definition will differ from one issuer to another. Such limitations aim at reserving the access to Private Assets to investors who are able to face the risks inherent to long-term and non-liquid investments.

For similar purposes, Baloise has set a corpus of rules and criteria to determine upfront whether such an investment can be made via a given policy. Hence the reason why the investment in private securities is reserved to category ‘D’[2] policies with a ‘dynamic’ or ‘aggressive’ investment strategy. Moreover, the policyholder will have to sign specific documents and forms either upon subscription of the policy or at any time thereafter – to the extent it is done prior to any investment in private securities – that shall formalise their interest in private investments and inform them of the relating risks.

[2] Category D policy refers to a policy subscribed by a person with a minimum movable wealth of € 2.5 Million out of which at least € 1 Million has been paid as premium on their life-insurance contract. Subject to a case-by-case analysis by the company, derogations may be granted to some extent.

As part of our unquoted investments’ procedure, any request for an investment in a new Private Asset (i.e. an asset that has not been subject to Baloise’s due diligence yet) has to be submitted to Baloise ahead of the actual prospective investment date (closing date), with a sufficient timeframe to allow our teams to perform the compulsory due diligence.

The investment due diligence request is made either by the asset manager of a Dedicated Internal Fund (DIF) or the policyholder in the case of a Specialised Insurance Fund (SIF), depending on the type of insurance fund (DIF or SIF) linked to the policy.

To enforce this new process, we have updated the contractual documentation organising the DIF (management mandate) and the SIF (SIF agreement and mandate for the reception and transmission of orders) to provide for a commitment of the involved financial sector’s professional to comply with this prior process. The professional also agrees to submit to the results of our due diligence. If its conclusions are negative, the investment will not go through.

Due to the characteristics of Private Assets (as already detailed above), it is not recommended to invest the full premium of a policy in such non-liquid and not easily transferrable assets. An obvious consequence would be the actual impossibility for the policyholder to request for a partial surrender of their policy in case of urgent need for liquidities.
Moreover, depending on the place of residence of the policyholder, minimum liquidity ratios may have to be maintained at the level of the policy (for protection purposes). 
For all these reasons, Baloise has determined several liquidity ratios that shall apply to any contract where investment in Private Assets is possible. It implies that a minimum percentage of liquid assets shall be maintained at all times within the policy. In case of investments in Private Assets through commitments, the total committed amount is taken into account for the purpose of computation of the liquidity ratio. As a result, the total committed amount shall be made available to the policy from investment date and may not be allocated to any other illiquid investment.
The applicable ratio will be adjusted depending on the status of the policyholder (individual or legal person), their place of residence and the nature of the contract (life-insurance policy or capitalisation contract). 

It has to be noted that this ratio applies at the level of the contract itself, not at the level of the unit-link (i.e. the insurance fund). It would therefore be possible to back one given policy to two different unit-link pockets, one that would invest exclusively in Private Assets, while the other will mainly invest in liquid assets, in order to maintain the necessary liquidity ratio for the whole contract.

As previously mentioned, such a transfer is not easy. It is therefore of the utmost importance to analyse carefully the transfer process provided in the issuing documentation during the unquoted investment due diligence. As part of Baloise’s due diligence process, our teams negotiate with the issuer in order to pre-arrange a smooth exit route to facilitate the divestment from the unquoted asset, in case the policyholder files a surrender form with a request to receive payment of the surrender amount in kind. If a negotiated solution may not be achieved in this respect, Baloise will not authorise the investment (negative due diligence).
It should however be noted that such a transfer is also conditional to the fact that the policyholder is considered by the issuer as an ‘Eligible Investor’ in accordance with the definition provided in the issuing documentation. If the policyholder does not fit with said definition, it will not be possible to ‘force’ the transfer in kind. Instead, we will have to request the issuer for an early redemption, if such a possibility has been negotiated, with all the consequences that it may entail (penalties, etc). We might otherwise have to proceed with a transfer of the asset to an Eligible Investor, which may prove a time-consuming and quite unpredictable process, in order to pay the counter value in cash of the private investment.
The policyholder requesting for a transfer of the Private Assets invested through their policy should also be aware of the fact that, when the asset is transferred, all the relating pending obligations (e.g. recallable distributions, capital calls payment, etc) and commitments shall as well come along.

It really depends on the type of unit-link to which the policy is backed: a DIF or a SIF?

• Policy backed to a DIF: under this scenario, Baloise appoints a professional asset manager, who will be responsible for the selection and the dedicated management of the underlying assets. The policyholder shall not – under any circumstances - take part to this process or even be in contact with the asset manager.
• Policy backed to a SIF: the situation is completely different as in a SIF, there is no asset manager. Instead, the policyholder has the power of decision[3] when it comes to the selection of the underlying assets. They may be assisted by an investment advisor (appointed by the policyholder).

It is obvious that the SIF offers more freedom to the policyholder. It has to be noted, however, that it is not available on all the markets. Depending on the actual residence of the policyholder, they may have the opportunity to back their policy to a SIF or not.

[3] Within the limits provided by Luxembourg regulations (Letter-Circular 15/3 of the Commissariat aux Assurances) and any other restrictions mentioned in the insurance contractual documentation, as the case may be.

Anticipating this issue is often the culminating step (and sometimes the point break) of our due diligence process.

If we cannot manage to solve this issue upfront with the issuer, the due diligence stops with a negative result. Hence, no investment.

If we succeed and manage to pre-arrange a smooth way out in case one of these agreed circumstances takes place, the investment is possible with more comfort and visibility for all the parties involved. In this respect, the fact that the policyholder / beneficiaries are Eligible Investors according to the issuer would obviously be a major plus.

It may however happen that due to external reasons out of the control of both the insurer and the private issuer, the exit takes more time than expected. In such a situation, Baloise shall make sure that the immediately transferrable part of the policy is paid in due time, while actively working to speed up the exit process of the remaining private investment.

Such a transfer of a Private Equity asset to a policy is not possible. It has to be noted however that it is not because of its private nature. The reason why Baloise would reject such a transfer is solely justified by the personal ties existing between the policyholder and the holding company. If an asset is personal to the policyholder (i.e. they appear as its beneficial owners or are the controlling persons of the entity), it is considered as a non-eligible asset within the policy.

Similarly, a policyholder who would happen to be the controlling person of a listed company (e.g. CEO) would not be able to invest via their policy in securities issued by said listed company.