Income Oriented Investment strategies

Merus sources thoroughly researched income generative opportunities from all areas but most are primarily in the form of private credit strategies. Many of these opportunities exist due to the exodus of traditional lending sources from their respective industries. The strategies typically carry high levels of collateral with loan-to-value metrics ranging from 30% to 65% and have historically produced cash on cash returns from between 8% and 12%.  Other strategies emerge from dislocations within the public markets due to oversold or misunderstood scenarios.

The strategies listed below are examples and may or may not be currently offered on the Merus Advisors investment platform.   

First Lien Lending

These funds are  private, non-bank, asset based lenders providing short-term bridge loans.  Depending on the fund, the borrowers are residential purchasers, contractors rehabbing multi-use units or seasoned real estate owners located in key national metropolitan areas. All loans are secured by first trust deeds on real properties with ample equity and in many cases have personal and corporate guarantees as well. The funds seek to preserve capital while generating a high level of current income, typically between 7% and 11%. The returns stream is unrelated to traditional securities markets and their typical shorter term duration loans limit interest rate risk. 

Litigation Finance

A major barrier of access to justice is cost. Litigation finance promotes access to justice because funders provide finance for the prosecution of meritorious claims by parties who otherwise lack the resources to do so. Insurance companies endeavor to deny claims, delay payments, confuse consumers with incomprehensible insurance-speak and retroactively rescind policies to anyone who may cost them money. Litigation finance is the process of lending capital to law firms and plaintiffs who are fighting a case with precedence and possess a high likelihood of winning. Through a capital infusion from a litigation finance provider law firms can take on more mass tort cases and plaintiffs can get the breathing room they need to wait out a fair settlement offer. Litigation finance helps ensure that cases are decided by merit rather than resources. Expected returns range from 12% to 18% but have a moderately lower liquidity profile.

Master Limited Partnerships

Master Limited Partnerships, or MLPs, are types of business which exist in the form of publicly traded limited partnerships.  MLPs are most common in the energy industry where they are engaged in the transportation, storage, processing, refining, marketing, exploration and production of natural resources, mostly oil and natural gas.  These partnerships generate predictable and growing cash flows (and distributions). MLPs are tax advantaged in that all gains and losses are passed on to the limited partners (pass through income) and are not taxed at the corporation level, thus avoiding double taxation.  Further, distributions to investors are tax-deferred until the unit-holder sells the units. MLPs have exhibited a low correlation to stocks and bonds over time. The closer the type of MLP is to the wellhead, the higher the correlation to the natural resource.  Our managers run a diversified portfolio of mid-stream MLPs (pipelines, storage, etc.) that are selected based on fundamental analysis and produce yield of 6% to 9% per annum with total long term return expectations in the mid-teens.  

Receivables Factoring

The investment objective is to earn superior returns by identifying inefficiencies that exist in niche segments of non-publicly traded markets due to perceived complexity, an under served sector, or no prior need for financing. In order to protect principal, funds will take senior or structurally senior positions that are collateralized through secured financings, alternative investment structures, or direct acquisition of assets. The risk exposure target is related to the timing of repayment rather than the probability of repayment. The key characteristics of the lending strategy are utilizing direct, non-competitive sourcing channels, establishing senior secured positions backed by realizable collateral, and employing high cash flows that are sufficient to pay off their loans. The diverse set of underlying investments, protective term structure and the secured collateral pool should enable the fund to generate high current income through most economic cycles.

Tax Lien Lending

Tax lien loans are made primarily to homeowners to help them meet their property tax obligations. Tax liens are generally given a priority over all other property liens, including those associated with a mortgage. Some states have created statutes and regulatory oversight that allow taxing jurisdictions to transfer individual tax liens to lenders who pay delinquent property taxes on behalf of property owners. The primary benefit of these statutes is that the local government transfers the first lien position to the lender. As a result, the loans are secured by a first lien on real property at a loan-to-value historically below 20%. This lien assigns most of the enforcement and foreclosure powers of a taxing jurisdiction to the lender. The senior position provides incentive for the mortgage owner to pay off the lien in case the property owner does not. The high level of collateral and double-digit yield makes tax lien lending an attractive investment opportunity.

Life Settlements

A life settlement is an unwanted or unneeded life insurance policy that is sold from the original policy owner to a third party for more than the cash surrender value but, less than the face value. Life settlements are a form of longevity asset, which derive their return based on the life spans of individuals. Once the third party becomes the new owner and beneficiary of the life insurance policy, it is responsible for the premium liability and will receive the net death benefit once a maturity has occurred. This is an evergreen strategy that can generate both a high level of current income and long-term capital gains. Target total return is 8% to 12%.

Government Contract Lending

The U.S. Federal Acquisition Regulation requires that 23% of federal contracts be awarded to small businesses, 5% to woman-owned, 5% to minority-owned and 3% to service disabled veteran-owned businesses. That mandates over $200 billion of the federal budget for contracted goods and services be awarded to the approximately 47,000 small business contractors. Those small businesses require financing to bridge the period between work execution and completion of payment from the U.S. government agency, which is obligatory within 60 days. Traditional banks often don’t lend to these types of companies due to the shorter term nature of their contracts. This investment strategy serves to fill that financing void. The strategy is expected to return 9% with the underlying assets being highly liquid.

Insurance-Linked Securities

Reinsurance is effectively insurance for insurance companies. Insurance companies are required by law to limit total losses that could be incurred from any particular natural disaster. The law exists to ensure the company's ability to make payments to all insurance policy holders. The insurance company acquires the necessary reinsurance by selling insurance-linked securities (instruments that allow insurance risk to be transferred to the capital markets) to investors. The 2017 hurricane season was the 5th most active season on record but it was also the most costly ever. The 2019 typhoon season was also relatively active. Typically in the insurance business after a claim is made policy premiums increase. Some premiums increased by as much as 20%, making 2020 an attractive entry point. A conservative expected net return for the reinsurance fund is 8% to 12% depending on the number and severity of natural disaster events. The fund's return is entirely uncorrelated to traditional securities markets.