This month, Jay chatted with Kevin Murphy, Co-Founder and Chief Executive Officer at Provenio Capital. The pair discuss the intersection of investment management and life insurance, the case for using PPLI and PPVA, Kevin's family and their multi-generation experience in the life insurance industry, and, of course, food!
JAY: As interest in private placement life insurance has skyrocketed the past few years, I thought it important to sit down with someone whose business is integral to the success of a PPLI policy or a PPVA. Kevin, you and several generations of your family, have a background in life insurance. What I find interesting is that you took your experience in our industry and put it to work in the investment space. That said, you ended up not straying too far from life insurance and often find yourself and your firm involved in very large premium transactions. Tell me about the firm you co-founded, Provenio Capital, and the work you do there.
KEVIN: Jay, thanks so much for inviting me to do this. Starting out in the life insurance business and working with high-net-worth families really opened my eyes to what these families value most – their goals and objectives. I took great pride in nurturing those relationships, always aiming to deliver the best possible experience and value. As my clients went through significant financial changes, I often had the chance to introduce them to other investment advisors, typically from large banks and brokerage houses. Observing these major players, I realized there was a unique opportunity to explore more intriguing investment strategies beyond the traditional scope.
This perspective changed when I met my partner, Ben Durrant. At the time, Ben was the Chief Investment Officer of a single-family office. He happened to sublet office space from me, and I would occasionally overhear their discussions about investments that other families and offices were keen on. These conversations piqued my interest in the alternative investment space, leading me to primarily focus on these types of investments.
In 2016, Ben and I launched Provenio Capital with the vision of creating tailored alternative investment portfolios for families and family offices. We recognized that while alternative strategies offer great opportunities, they can also be tax-inefficient and come with high fees. That's where the idea of incorporating private placement structures into our client portfolios emerged – to enhance tax efficiency and improve net, after-tax, and after-fee returns. Our commitment is to understand and align with our clients' unique needs, acknowledging that every investment decision is personal and carries its own set of risks and opportunities.
I'm deeply involved in maintaining our relationships with the families we serve, always seeking solutions that truly align with their needs. I believe the key to our success in managing money within these structures is a blend of my background in insurance and planning, combined with Ben's expertise in investing and alternatives. It's a powerful combination that really sets us apart in the field.
JAY: I met you last summer when one of my firm’s individual consulting clients for whom we were running their acquisition of PPLI asked us to check out your firm and he ended up selecting you as the manager for his family’s policies. What I found unique about you and your partner, Ben, was the enthusiasm you hold about how PPLI and PPVA can serve an investor. We will get to that but, first, I want to hear about your upbringing and your career path that led you to and through the life insurance industry to today. You should definitely mention your father who had a long career with Pacific Life.
KEVIN: Growing up in Newport Beach with my dad, Jim Murphy, working at Pacific Life, I had a front-row seat to the life insurance world. He was a part of Pacific Life for over 40 years, and watching him build strong, lasting relationships with clients had a profound impact on me. The industry felt very family-oriented, and I was always drawn to the stories about how life insurance profoundly affected families, both in times of need and in times of loss.
A pivotal moment for me was when I was 18. My dad suffered a major bicycle accident that almost cost him his life. Thankfully, he had a substantial disability policy. This policy was a lifeline for our family, enabling my sister and me to go to college and helping us move forward during a challenging time. Experiencing first-hand the impact of insurance on my own family really cemented my interest in this field.
Starting my career at Minnesota Mutual and then moving to M Financial, I learned the ins and outs of the industry – from understanding clients’ needs to creating tailored solutions. These experiences have been fundamental in shaping my approach to working with families.
And now, the tradition continues with my son, JT, who's just embarked on his own career in life insurance. It's incredibly fulfilling to introduce him to this world. One aspect I'm particularly passionate about is succession planning and ongoing policy servicing. In the insurance business, this often gets overlooked. Being a second-generation insurance professional and now having my son as the third generation, we’re really highlighting the importance of multi-generational planning and service for our clients. It’s more than just a policy; it's about building a legacy of trust and support.
JAY: Having that background with Minnesota Mutual and the M Financial Group certainly must have helped you understand how affluent clients think about their financial situations, including tax and estate planning. Where your clients at Provenio are concerned, where do you see PPLI and PPVA fitting in? What do these products accomplish?
KEVIN: Reflecting on the first 15-20 years of my career, where I closely worked with high-net-worth families on their life insurance needs, it's become clear to me where PPLI and PPVA fit into the picture for our clients at Provenio. These products are incredibly versatile and play a significant role in various aspects, whether it's income tax, estate planning, or philanthropic efforts.
One of the most striking benefits we've seen is the power of tax deferral. It's huge. Taxes can really chip away at a portfolio's value, but with PPLI and PPVA structures, that burden is significantly reduced. Many families are initially surprised to learn just how much of an impact taxes can have, especially on alternative strategies. So, being able to implement unique and specialized strategies in a tax-efficient way has been a game changer.
However, it's crucial to recognize that these structures may not be suitable for everyone. Factors such as investment objectives, risk tolerance, and the complexity of tax laws should be carefully evaluated. We strive to provide a balanced view, ensuring our clients understand both the opportunities and the challenges these products may present.
And now, having managed portfolios within these structures for over five years, the long-term benefits are becoming increasingly evident. It's not just about short-term gains; it's about creating lasting financial stability and efficiency, which is something we emphasize and prioritize at Provenio.
JAY: You of all people know that life insurance and investment people speak different languages, and, in my opinion, I think life insurance professionals do not quite understand the specific types of investments where PPLI and PPVA work well. For example, right now, I know private credit makes sense to invest in through a policy. Why is that and what are some other compatible strategies?
KEVIN: Private credit is a great option for private placement structures, mainly because these are typically ordinary income in nature. In fact, when you look at most investment strategies, you'll find they can be quite effective within a PPLI structure. Private credit stands out, but given the tax-efficient nature of PPLI, you could argue that almost any strategy could thrive in this environment.
However, it's worth noting that because PPVA converts everything to ordinary income, it might not be as advantageous to include strategies focused on long-term capital gains. PPLI is superb for its tax benefits, but it involves medical underwriting and insurance components, which can be complex. On the other hand, PPVA is simpler and more cost-effective, making it an excellent option, especially for those interested in philanthropy or leaving money to a charity or foundation.
Beyond just picking the right investment strategies, how you structure these investments is crucial. Unfortunately, this is an area often overlooked by many investment professionals, to the detriment of their clients.
At Provenio, our approach is to look for smaller, more unique strategies that aren't widely adopted. Our team is dedicated to conducting thorough due diligence, ensuring we identify the most effective and quality outcomes for our clients. It's not just about finding good investments; it's about finding the right fit for each family's unique needs and goals.
JAY: In the PPLI space, we are witnessing the rapid ascent of managed accounts as the investment vehicle of choice underlying a policy. Traditionally, for more than two decades, insurance dedicated funds, or IDFs, ruled. In 2023, most life insurance companies offering private placement reported between 40% and 58% of the policy accounts opened last year utilized managed accounts. Why do you think this trend toward adoption of managed accounts is occurring?
KEVIN: When we first jumped into this business, we established our own Insurance Dedicated Fund (IDF). But you know, as the rules started changing over the past couple of years, our focus shifted more towards setting up Separately Managed Accounts (SMAs) within these structures. What's really exciting about SMAs is the level of customization they offer. We're able to tailor portfolios more precisely to our clients' needs, and in some cases, this means a more concentrated approach for our families.
And there's another thing to consider – the risk of over-diversifying a portfolio. It's a real thing. Wealthy families often prefer having a portfolio that's crafted to their specific goals and investment preferences, rather than just being part of a commingled fund where customization options are limited. With SMAs, we can really home in on what our clients are specifically looking for.
I think this trend towards managed accounts is really about offering that personalized touch. Families want to see their unique needs and goals reflected in their investment strategies, and SMAs allow us to do just that. But with that said, it's important to acknowledge that IDFs also have their merits, particularly for investors seeking the benefits of pooled investment strategies with certain sizing requirements. The choice between SMAs and IDFs depends on the investor's specific needs, investment objectives, and the level of customization desired.
JAY: Turning our focus back to Provenio's journey and its current standing, what accomplishments fill you with the most pride?
KEVIN: Hands down, the highlight has been the remarkable team we've assembled. From our humble beginnings with just four members, we've expanded to a dedicated group of 11, transitioned to a larger office space, and are even discussing further expansion later this year. We’ve curated a group of motivated individuals, each bringing their own distinct and complementary skills to the table. Their development is as crucial to us as the progress of our clients. While the term 'family' might seem overused, it's apt to describe us as a cohesive unit, diverse in thought and united in our commitment to excel and challenge one another.
JAY: You have a large family and many of them live within a mile and a half of you in Orange County. Do you spend much of your free time with them? How else are you spending your time outside of Provenio?
KEVIN: I've been incredibly lucky to grow up in Newport Beach and to have attended Corona del Mar High School – that's where I met my wife, Tracy. It's a wonderful thing, our four kids all went to CDM too, and we've really put down roots in this family-oriented community. It's been amazing to build and maintain lifelong relationships here. It’s so heartwarming to see our kids now becoming friends with the children of our own friends. These deep, multi-generational relationships have not only been a big part of my personal life, but they've also played a significant role in my business decisions.
When it comes to helping clients and their families, I always think about the kind of choices I would make for my own family. It's about more than just numbers and strategies; it's about real lives and long-term well-being.
Outside of work at Provenio, I love spending time with my family and friends. I’m really into golfing, playing pickleball, and just enjoying all the outdoor activities that our beautiful surroundings in Newport Beach offer. It's such a privilege to live in this place. And, having my dad in the insurance industry here too, it’s like everything has come full circle – from family life to professional life. It’s all interconnected in a way that makes every day meaningful.
JAY: This has been great, Kevin. It is not often I get to speak to someone who has three generations of life insurance experts in their family! We have arrived at our famous restaurant question, and I know you are prepared. Without naming a steakhouse or a steak dish, tell me about some of your favorite restaurants and let me know what I should order from the menu.
KEVIN: The original A Restaurant on PCH continues to be one of the top dining destinations around. Their yellowfin sushi roll? Simply unbelievable. Bandera also holds a special place in my list of favorites. And if you're at Eddie Vs, you can't miss out on their yellowtail jalapeno sashimi – it's phenomenal. You might notice there's a trend in my choices!
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.