05/11/2011

Fortress Draws a Crowd for Death Benefits

Fortress Investment is planning to auction off $1.4 billion of life settlements that it seized from a failed hedge fund, in an offering that market players are viewing as a bellwether of sorts.

The New York investment giant is aiming for June 2 to name a winner, with Houlihan Lokey overseeing the process via a unit that helps clients dispose of illiquid fund assets. Already, word is circulating that the portfolio is fetching offers higher than those garnered in other recent life-settlement sales — many of which went for pennies on the dollar.

Fortress gained control of the investments via a series of events involving a vehicle called HM Ruby Fund run by Himelsein Mandel Fund Management of Los Angeles. Like other life-settlement buyers, Himelsein Mandel was purchasing the rights to collect on senior citizens’ life policies when they die via arrangements that required it to take over the policyholders’ premium payments. But like many of its peers, the shop accumulated so many policies when the market was booming in 2005 and 2006 that it couldn’t keep up on its obligations.

Himelsein Mandel then borrowed $65 million from Fortress to help cover servicing costs. And after Himelsein started missing loan payments late last year, Fortress forced a foreclosure sale.

As many life-settlement buyers blew up or shifted to other areas in recent years, large players including Fortress, Apollo Management and Oak Tree Capital began viewing those shops’ holdings as potential distressed-asset plays. Indeed, it appears Fortress’ dealings with Himelsein Mandel may have been geared toward wresting control of the firm’s holdings all along.

Fortress initially scheduled its auction for May 10, but pushed back the date amid heavy interest from prospective buyers. With the portfolio’s projected price on the rise, indications are that the $44.6 billion firm will get its principal back and then some, one source said.

Fortress wrote the loan to Himelsein Mandel via a distressed-asset group run by Peter Briger, a principal who likes to refer to himself as a “financial-services garbage man.” His staff encompasses 300 professionals who have been scouring the market for troubled investments involving assets as diverse as U.S. municipal tax liens and real estate in Japan.

On the life-settlement side, the group’s dealings included the purchase last year of a multi-billion-dollar book of contracts from KBC Bank. The division later raised $500 million for a vehicle called Fortress Life Settlements Fund, and so far has put at least $264 million of that money to work.

Broadly speaking, Fortress’ distressed investments have been performing well. Its Drawbridge Special Opportunities Fund, for example, posted a return of more than 25% last year. And the shop has been telling investors that it still sees ample opportunities across the sector.

Meanwhile, it’s unclear what has become of Himelsein Mandel. The firm was run by Wayne Himelsein and Jason Mandel, but a woman who answered the telephone there said she did not know where to reach Mandel. A recorded message also made it clear that worried investors had been calling, and advised them to get in touch via email.

An active market for life settlements began to emerge about 10 years ago. Along with missteps by firms that simply got in over their heads, trading of the instruments was ultimately stymied by the financial-market downturn, redemption requests by fund investors and revised calcaluations by actuaries that showed the life expectancies of policyholders had been underestimated. For the few buyers that were snapping up distressed portfolios at rock-bottom prices in recent years, annual gains have been as high as 25%.

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