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Temasek unit to open private equity door for retail investors

Sources believe Temasek unit Azalea Investment is closer to launching vehicle, likely through an asset backed security

"There will be years when public markets outperform PE, but when you take on a sustained rolling five or 10-year period, PE should do well," says Dr Teh.


TEMASEK subsidiary Azalea Investment Management is working to open up access to private equity (PE) investments for retail investors.

Access is likely to be made possible through an asset backed security - that is, a bond instrument collateralised by a diversified portfolio of PE funds.

Azalea pioneered a similar structure here in 2016 when it launched Astrea III, a series of fixed rate notes whose assets - comprising 34 PE funds - have a current net asset value of nearly US$1 billion. About US$510 million worth of bonds were issued, which were eight times subscribed.

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Astrea III's issuance was tranched to cater for a range of risk appetites and investment horizons. The least risky tranche - Class A-1 bonds - would repay principal at the end of three years, and paid a fixed interest of 3.9 per cent a year. Class A-2 and Class B bonds paid an annual interest of 4.65 and 6.5 per cent, respectively

At the time of Astrea III's launch, Azalea chief executive Margaret Lui said that Temasek's goal was to broaden its co-investor base and Azalea was "actively exploring" opportunities to let retail investors subscribe for PE bonds.

Astrea III was limited to accredited investors who had to invest at least S$250,000 for Class A-1 bonds, and at least US$200,000 for the two other listed tranches - Class A-2 and Class B.

A new issuance, dubbed Astrea IV, was reported last year in, and Private Equity International. An entity named Astrea Capital IV Pte Ltd was incorporated last August based on filings with Acra (Accounting and Corporate Regulatory Authority).

Market sources believe that the firm is closer to launching a retail vehicle. When contacted, the firm declined to comment on market speculation.

However, Azalea chairman Teh Kok Peng, a veteran of both Monetary Authority of Singapore and GIC, said that the effort to make PE available to the man-in-the-street makes possible "financial inclusion on the savings side".

"Most of the middle class in Singapore or globally have savings but the savings tend to go into bank deposits or simple instruments where the returns are not very high. If you can create a vehicle available to retail through a structure that makes it less risky, that would be a good thing.

"If I can give retail investors a rate of return, risk-adjusted of one per cent higher than what you would otherwise get, or more, on a compounded basis, that adds up to quite a lot over 20 to 30 years."

Dr Teh was concurrently deputy managing director of GIC and MAS in 1998. For more than a decade from 1999, he was president of GIC Special Investments, the private equity arm of GIC.

Interest in PE has surged in recent years, as investors sought returns above traditional markets. Preqin, which provides data and intelligence to the alternative assets industry, reported that PE assets hit a record US$2.38 trillion at end-June 2017, an increase of US$248 billion from 2016. Record fundraising pushed dry powder past US$1 trillion for the first time. Preqin said, however, that investors and fund managers are concerned about the impact of the capital influx on deal making, the exit environment and future returns. "... with so much capital available to fund managers, the deal making market has become unprecedentedly competitive", it said.

PE, an asset class investing in private companies, is typically the preserve of institutions, family offices and ultra wealthy individuals. This is because PE funds are illiquid with long holding periods which may range between eight and 10 years.

Dr Teh said PE funds' ability to create value arises partly from their focus on the long term. "The key is to pick general partners with the skill set as a team that enables them to buy good companies and make them better. Or, they buy bad companies and turn them around. That is part of value creation. Stock markets, particularly in the developed world, are becoming more efficient and tend towards being a zero sum game."

Recent years have seen a trend towards institutionalisation. The weight of money has favoured larger, more established firms such as Blackstone and KKR. In the process, returns have also moderated.

"In the early years of the PE industry, you can leverage and buy cheaply. Because you have a long horizon you can catch the market when it is down and exit when it's high. Those areas of inefficiency will get less. But to the degree that they take the longer term view, they create value...

"But returns will come down as more money is institutionally invested. If someone says PE funds can still give you 20-per cent plus IRR, they are in a dream world. I suspect the average net return figure to the investor is now in the mid-teens."

He adds: "You have to give a rate of return for taking on illiquidity risk, of about 300 basis points higher than public markets on a long term basis. There will be years when public markets outperform PE, but when you take on a sustained rolling five or 10-year period, PE should do well."

Preqin has found that investors and fund managers are concerned about valuations; 34 per cent of investors expect returns to be lower in the coming year.

In Astrea III, the firm sought to mitigate risk by investing in "mature" PE funds where the cash flows from distributions are more predictable.

A typical PE fund tends to show negative cash flow in early years due to drawdowns to fund new investments. Cash flow should eventually turn positive as investee companies are sold at a profit.

Based on Astrea III's latest annual report for the fiscal year ending in March 31, distributions were strong throughout the year amounting to US$300 million, which represented 26 per cent of the portfolio NAV as at March 31, 2016.