Teri Mahu and Joe Francisco of Comerica Bank talk about the importance of investment in a captive’s growth process and outline why picking the right partner is key
Teri Mahu and Joe Francisco of Comerica Bank talk about the importance of investment in a captive’s growth process and outline why picking the right partner is key
The journey of growth from a start-up to a more mature captive can include many starts and stops. The investment process, although a very small factor in the overall picture of a new captive, becomes an increasingly important element throughout the growth phase.
Choosing the right investment partner, in the beginning, may help keep the growing process from becoming too overwhelming. An experienced broker will be able to educate a captive on the array of investment vehicles available to them and explain how those vehicles fit into their current needs and projections.
As a brand-new captive, investment dollars tend to be very limited and, therefore, investment vehicles must be liquid and low risk. Thanks to the recent rise in short-term interest rates, there are many options that fulfil those needs, such as money market funds, US treasury bills and commercial paper. A primary consideration for a new captive is keeping money safe and available as claims are processed.
Climbing the investment ladder
As the captive continues to grow, building up surplus, and as cash flows become easier to forecast, it is the perfect time to implement an investment ladder to take advantage of rate fluctuations. Investment ladders can be completed with a combination of numerous fixed income products.
Some combination of certificates of deposit, treasuries, agencies, corporate bonds, and collateralised mortgage obligations could possibly fit in the investment process.
If a letter of credit is being utilised, one should work with the issuing bank, which will have specific guidelines for accepted collateral and the loan-to-value ratio (or haircut) on those assets. Maximising the loan-to-value ratio can be just as important as your targeted rate of return on your assets, so it is important to find the right mix of investments.
Equity exposure
In addition to the investment ladder, once a captive becomes more established, it might be a good opportunity to incorporate some equity exposure into the portfolio. This provides the captive with a possible opportunity to take on some risk for extra growth. Equity exposure can be obtained through individual stocks, exchange-traded funds, or open/closed-end funds.
Once at this level of maturation, you may either continue to embrace the investment process internally or look for an investment partner to manage the captive’s investment process.
Typically, in a managed arrangement, a quarterly fee is charged based on the total assets in the account and, in many cases, an investment account will need to meet minimum size restrictions.
With a non-managed brokerage relationship, one will pay an embedded fee on the transactions as they occur and work directly with the broker to hit the various income and cash flow targets.
It is important that whomever you choose as a partner has a good working knowledge of captives and their differing structures and needs through various stages of the lifecycle. Sources for that investment partner may come from your banking services provider, as well as referrals from the captive manager or other members of your team of captive professionals.
Conferences and trade publications can be another place of reference to find helpful information on potential partners. Making the right choice of engagement may make the growing process less painful.
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