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Bite-sized investments with a bang
PRIVATE equity (PE) investments have garnered much attention in recent years, thanks to an increased appetite for assets that can generate returns far above traditional markets. At Union Bancaire Privee (UBP), PE allocations are a relatively modest segment of a client's overall asset allocation. Even so, PE propositions are in line with UBP's overall approach to investment advisory: the recommendations are conviction driven, rooted in an understanding of clients' needs and risk appetite; and they reflect an ability to be agile.
Says Ranjit Khanna, UBP head of South Asia, on the bank's approach: ''We follow through on our convictions in the way we invest and our asset allocation models. Our ability to go bespoke is very strong. We need to understand our clients' risk appetite and we adjust to that. The starting point may be a conservative or moderate portfolio, but we have the ability to tweak it to their specific requirements. Many institutions do this at a large ticket size. Our ability to do it at bite size is very unique.''
Agility is reflected in the bank's ability to roll out thematic tactical opportunities. This overall approach is evident in a number of initiatives. One is the establishment of the Direct Investments Group (DIG), a unit which scouts for and researches private market investment opportunities generally available only for large institutions and sovereign investors. These opportunities are presented to UBP private clients in bite-sized portions. This means clients can access the investments with capital of US$250,000.
The investment propositions proposed by DIG are, like most PE assets, illiquid and require holding periods of between three and 10 years. The investments are in real assets and help to diversify a portfolio.
Mr Khanna says: ''A general rule of thumb for client investments into direct investments is that such deals should not form more than 5-10 per cent of their portfolios. The investments tend to be illiquid and will remain so for a number of years. Hence, the cap on the proportion to be invested.
''Our Asian private clients who have made their wealth as entrepreneurs understand and appreciate the 'tangible' nature of direct investment opportunities. Real investments are what they deal with in their entrepreneurial day-to-day lives, and they tend to have an intrinsic capability to identify appropriate opportunities. So it is with a real interest that they participate in such a programme that differs from their other financial assets.''
This year, for instance, clients had the chance to invest in a European seafood restaurant chain with a view to a capital gain. The bank raised some 78 million euros (S$124.3 million) among its clients. The chain currently has 373 restaurants across four countries. The plan is to convert the company-owned restaurants to a franchise system which would raise efficiency. About 150 new restaurants in Germany and neighbouring countries are in the pipeline. The time-to-exit is estimated at five to seven years, and the expected IRR is 15 to 20 per cent. Last year's opportunities included German ''micro'' apartments or student accommodation. The time-to-exit ranged between three and five years, and the expected IRR was also 15 to 20 per cent. In terms of income opportunities, clients were also offered a proposition to finance an operating Emirates aircraft. The expected dividend yield was 9 per cent, and the target IRR at 7 to 8 per cent. The time-to-exit is between three and seven years through an asset sale.
In terms of more tactical opportunities through public markets, UBP has created open-ended investible certificates with themes that are expected to have medium to long-term relevance. One is the ''car of tomorrow'', which offers exposure to sectors that may benefit from autonomous and electric cars. These sectors include semiconductors, battery, automotive and raw materials suppliers, and advanced artificial intelligence and technology.
There is also a ''millennials'' certificate which puts together a portfolio of stocks in the sectors most exposed to millennials (19 to 35 year olds) and centennials (0 to 18 years old). These demographic segments are expected to account for 59 per cent of the global population and 60 per cent of global workforce by 2020. The sectors that are expected to benefit include IT, media and entertainment, and social media and lifestyle companies.
Meanwhile, as the trade skirmish between US and China heats up, global markets have taken a beating amidst the expectation of higher interest rates and uncertainty over the economic fallout. Mr Khanna says UBP client portfolios are relatively well positioned. ''We have been buying protection throughout. We're much better positioned than the market today, even though if the market generated double digit returns we would give up some upside.''
In a column, Anthony Chan, UBP's chief Asia investment strategist, said that if the layers of tariffs expand to cover US$450 billion worth of Chinese exports, the potential cut to China's GDP growth could come close to a full percentage point. He believes, however, that China has sufficient ammunition to reduce downside risks. One possibility is that monetary policy could become more counter-cyclical and accommodative, such as further cuts in the reserve requirement ratio.
As at mid-June, Mr Chan sees increased downside growth risk which is negative for equities and more constructive for fixed income. In Asia he sees better value in local currency sovereign bonds than hard currency sovereigns. W