Private markets are key to the diversification game

AS WE enter a new decade, the challenges posed by volatile global markets are of great concern to investors; on the top of everyone's mind is what the new year has in store.

For 2020, our view is that manufacturing growth is showing tentative signs of bottoming out, setting the stage for an economic recovery. While it is true that US-China trade issues remain a major wild card, we see more opportunities than crises.

The question is whether the decade-long expansion of major developed economies can extend through the year and beyond, and how we, as a private bank, can navigate the environment to the benefit of our clients. No secret here, diversification of portfolio is key.

Going forward, sophisticated global investors and family offices will be planning to make larger allocations to developing market equities, private investments and real estate.

We see investments in the private markets as an important piece of the diversification puzzle, with a view to achieving enhanced returns uncorrelated to traditional markets.

Traditionally, non-institutional investors have accessed the private markets through funds or via fund-of-funds. Increasingly, we observe that global investors and family offices prefer direct investments as they offer greater control. Funds also charge management or performance fees which some investors consider to be too hefty.

Savvier family offices have been able to source for private investments through their own networks. But a significant majority look to their private banks to bring them differentiated direct investment opportunities.

The range of sectors these investors look at is broad - spanning from agribusiness to real estate. But the one sector that has seen a significant rise is technology.

THE TECH FACTOR

Tech companies - once the territory of specialised venture capital funds - are now a much larger and more attractive proposition to family offices. In 2017, tech companies attracted the bulk of new capital, accounting for 40 per cent of deal count, up from 20 per cent in 2014, said a Bain & Company report.

Silicon Valley does not have a monopoly on tech unicorns (companies with valuations of over US$1 billion) or decacorns (companies with valuations of over US$10 billion) anymore. The tech ecosystem, even in South-east Asia, has been rapidly expanding. For instance, the combined valuation of companies like Grab and Gojek is over US$20 billion.

Fintech, blockchain and artificial intelligence are among the top growing sub-sectors within tech that global investors are keen to explore - a trend which is likely to continue into 2020 and beyond.

At Bank of Singapore, we have been providing exclusive access to family offices and global investors, helping them to invest in high-quality private tech unicorns or decacorns. These companies are well known in the private space, anchored by strong institutional and private investors. They are also typically on the last or penultimate round of private fund-raising, before an IPO.

In response to the increased interest in tech investments, the bank arranged a meet-and-greet between our clients and innovators from Israel (also known as the 'Startup Nation'). This was well received by our clients who witnessed first-hand the innovations at the forefront of global technology.

However, I must caution that for every successful unicorn, there are many failures. A good way to mitigate this risk is to work with a reputed partner who can perform comprehensive due diligence and keep an eye on the performance of the investee companies on a regular basis.

But the game is not for everyone. For sophisticated investors, the opportunity cost of not participating in private markets outweighs potential risks. Still, those willing to study the evolving space of disruptive industries and investment structures stand to benefit from superior returns.

IMPACT INVESTING

While many eyes remain on the tech space, the private markets provide a bounty of options in another growing area of investing - impact investments

Many ultra-high net worth clients, particularly the younger ones, are looking to incorporate aspects of Environmental, Social and Governance (ESG) into their portfolios.

Such investments tend to cover a variety of sectors such as renewable energy, carbon-capture technologies, green construction, land and ocean conservation, biodiversity and sustainable forestry projects, property, health, education and social care.

According to the latest Global Impact Investing Network's annual survey, the impact investing market was estimated to be at US$502 billion in 2019, up from US$77 billion in 2015.

In a recent article for the World Economic Forum, International Finance Corporation chief executive Philippe Houerou said the sector can potentially grow much larger, "with dramatic implications for the world's development agenda". In other words, purpose and profit can co-exist.

The challenge for bankers is to identify appropriate opportunities for their clients who want to align their aspirations with their core beliefs. In particular, globally-minded younger investors are increasingly asking for sustainable targets in some of their investments. While impact investing has yet to hit the mainstream market, growth is expected, as ethical concerns become an important part of their investment decision-making process.