New bonds by Temasek fund could pave way for retail access to private equity

A Temasek Holdings-owned fund of private equity funds is offering a new kind of bond that could eventually pave the way for retail investors to 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, and marketed to institutional and accredited investors. The bondholders 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.

Because the bonds are senior to the equity investors, are backed by a broad portfolio of funds and have smaller minimum investment denominations than typical private equity funds, they can be marketed to and bought by smaller investors such as accredited and high net worth individuals who would otherwise not be able to access private equity funds.

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

The first 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 at year 5 provided there is enough cash. Both 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 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.

BT understands that the Singapore dollar-denominated Class A-1 bonds in particular are seen as a kind of testbed for a possible private-equity retail offering in Singapore down the road.

A spokesman for Azalea Asset Management, which was 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, are being marketed over the next month with issuance targeted in July.

Private equity funds are typically 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.