In the current context of economic uncertainty, investors are looking for alternative investments to diversify their wealth while obtaining above market returns. Thus, investing in assets with very little correlation with traditional asset classes generates enhanced returns.
In this regard, the recent pandemic and its consequences have put the spotlight on the vacant inheritance business. The sale and purchase of inheritance rights is not new, but after Covid, it has certainly caught the attention of a larger number of investors.
In Spain there are more than 400,000 deaths every day, and about 3-5% of these deaths do not have recognized heirs.
Inheritance Rights refer to assets that belonged to someone who passed away before a partition is executed and assets assigned to the legal heirs. “Vacant Inheritance Rights” are those when the deceased person did not leave a written will or when the heirs can not be reached.
These rights remain, therefore, in a kind of “stand by”, waiting to be assigned. In some other cases the heirs have no notice of the passing because of lack of re-cent contact or live far away from the deceased person, difficulting the necessary notifica-tions and legal procedures.
In this context, Alaluz Capital launched its first fund focused on vacant inheritance rights at the end of 2021. This fund is addressed to professional clients or to those who the legislation of the country in which they reside allows them to invest in a RAIF.
For this vehicle, the geographical scope of distribution is very ambitious. For this reason, it has been decided to set up a RAIF (Reserved Alternative Investment Fund) in Luxembourg – ALX Hereda SCA SICAV RAIF (the Fund).
Alaluz Capital is an asset manager regulated and supervised in Spain by the CNMV (Comisión Nacional del Mercado de Valores) and licensed to manage traditional and alternative assets. The company has extensive experience in the management of alternative vehicles under Luxembourg and Spanish law.
Given the idiosyncrasies of the asset class, Alaluz Capital relies on Grupo Hereda, a business group dedicated to inheritance law, which supports us in the process of searching and acquiring the inheritance rights. Grupo Hereda (investment advisor to the fund) has more than 20 years of experience managing inheritance rights in Spain. Acquired assets and approved deeds are deposited with TMF Luxembourg, and Deloitte is the external auditor who signs the fund’s accounts, verifying the value assigned to the assets every year. There are different reasons for an inheritance to become vacant:
- The deceased person did not leave a written will and, therefore, it is an intestate inheritance. In these cases, the State calls the heirs to succeed according to the law.
- There is a written will, and the identity of the heirs is known, but it is not possible to find them either due to family distancing between the heir and the deceased person or between co-heirs, or due to geographical location difficulties, thus making communication difficult.
In addition, heirs may have a strong incentive to sell their inheritance rights at a significant discount due to:
- Lack of liquidity to accept the assets and debt (expensive paperwork, immediate tax obligations and lawyers’ fees).
- The process is lengthy (between 18 and 24 months) and is not straightforward, particularly if there is no previous experience.
- Conflicts with other heirs: there are usually several heirs, who sometimes do not even know each other, and disputes and disruptions in the family unit often arise.
- Emotional disconnection with the inheritance: Some heirs prefer to receive cash rather than an asset to which they do not feel attached and that they do not know how to manage.
In this context, the Fund purchases inheritance rights, mainly real estate assets acquired at a price significantly below of their market value (60%-70% discount). To this must be added all the expenses and other items required to obtain the ownership of the assets, mainly in real estate, and their subsequent sale on the market.
The inheritance rights management process consists of four stages:
- Research and search: it includes the search and location of interesting vacant inheritances through a network of agents throughout Spain.
- Processing: Legal, administrative and negotiation processes needed in order to acquire and manage the inheritance rights. In this phase, Grupo Hereda has a proven track record of the whole administrative process.
- Selection and management: Alaluz Capital filters and selects the most suitable inheritance rights for the fund. The main selection criteria are:
- Features of the underlying assets.
- % of inheritance to be acquired.
- Number of total heirs.
- Potential liabilities or claims.
- Estimated timeframe to full execution.
- Execution: this last phase involves the sale of the assets and payment of its associated debts, taxes and fees. The Fund’s main purpose is not to generate income from real estate investments, but rather to rotate the portfolio and thus generate capital gains.
In addition, the Fund can also invest in other assets related to Inheritance Righs, such as the purchase of options on inheritances being managed by Grupo Hereda, or mortgage loans in arrears where the debtor has passed away. Alaluz Capital will assess the acquisition of these assets according to their suitability to the overall risk profile of the fund.
The nature of this fund really differentiates it from other investment strategies, traditional or alternative. Although it is true that it has a certain correlation with the real estate market in Spain, the attractive purchase price (discounts of over 60%) offers the Fund ample flexibility and the capacity to move in the face of adverse movements in the real estate market.
The Fund has a management fee of 0.50%. In terms of returns distribution, the investor receives the first 7% generated by the Fund, while the remaining will be distributed by applying an increasing scale between the investors and the asset manager, as a success fee. In aggregate, the initial estimated return expectations for investors are in the double-digit range.
Therefore, the fund has a significant flexibility to sell properties at significant discounts and rotate the portfolio, obtaining profits, even in times of market crisis. The particularities of this business mean that there is very little correlation with traditional capital markets, which makes it easier for the Fund to act as a haven in times of uncertainty.
For additional information about the Fund or how to subscribe, write to firstname.lastname@example.org.