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New bonds by Temasek fund could be PE ticket for retail investors

The bonds will be in four classes distinguished by seniority and maturity; one of these could become a testbed for a private-equity retail offering
Tuesday, June 7, 2016 - 05:50
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A Temasek Holdings-owned fund of private-equity funds is offering a new kind of bond that could eventually grant retail investors access to the asset class.

Singapore

A TEMASEK Holdings-owned fund of private-equity funds is offering a new kind of bond that could eventually grant retail investors access to the asset class.

The approximately US$500 million of fixed-rate Singapore-listed bonds will be issued by Astrea III, a US$1.1 billion fund of 34 private equity funds. Bond-holders will contribute about 45 per cent of the fund's assets, with the remaining 55 per cent in equity coming from Azalea Asset Management, an entity of Temasek, a Singapore government-owned investment company. The fund is being marketed to institutional and accredited investors.

The offering tries to broaden access by creating different classes of investors in the fund. By giving some investors preference in terms of default seniority and maturity date - and by subordinating Temasek, the equity investor - the bonds help to carve out a safe-enough product that can be bought by smaller investors.

The offering will comprise bonds in four classes distinguished by seniority and maturity:

The safest is a S$234 million bloc of Class A-1 bonds that are expected to be rated "A" and are expected to be redeemed by Year 3, provided the issuer has enough cash.

The second is a US$170 million bloc of Class A-2 bonds, also expected to be rated "A", but expected to be redeemed in Year 5, provided there is enough cash.

The Class A-1 and A-2 bonds have a final maturity of 10 years if they are not redeemed earlier.

There will also be US$100 million of 10-year, Class B bonds, expected to be rated "BBB", and finally, US$70 million of 10-year unrated Class C bonds. The Class B and C bonds may be redeemed early, but only after the Class A bonds have been fully repaid.

The Business Times understands that the Singapore dollar-denominated Class A-1 bonds, in particular, are seen as a testbed for a possible private-equity retail offering in Singapore down the road.

A spokesman for Azalea Asset Management, set up in 2015 to develop investment products based on private-equity funds for a wider range of investors, declined to comment, citing regulatory restrictions against marketing to the general public.

The deal, which is run by Credit Suisse and DBS Bank, is being marketed over the next month with issuance targeted in July.

The relatively long marketing period is understood to be a reflection of the uniqueness of the product, which is believed to be the first of its kind and will therefore require more time for investors to figure out how to price.

Private-equity funds are higher-risk products with high barriers to entry for investors. But Astrea III seeks to work around that in a number of ways.

The first is by being an investor in a large number of funds run by reputable general partners such as Blackstone, KKR, TPG and Warburg Pincus. The 34 funds in the portfolio hold stakes in more than 590 companies across a range of sectors, reducing the exposure that investors into Astrea have to failure in any single fund.

About 77 per cent of the funds are buyout funds, and the total portfolio has a weighted average vintage of seven years, which means that the assets are relatively mature and close to being cash generative as the underlying funds begin to make their exits.

That also reduces the credit risk for the fund, and provides confidence about cash flow for the bonds to maintain coupons and redemptions.

By structuring the product as bonds, Astrea also provides an additional layer of protection for bondholders, who rank above the equity partners in case of default.

Aberdeen Asset Management business development director Nicholas Hadow said the Temasek fund was capturing strong demand for alternative investments at the moment.

"They're tapping into a range of demand. You'd think this would be picked up by the private banks ... It's a market widening structure," he said.

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