Making private market assets more accessible

High net worth individuals (HNWIs) are increasingly looking to private market assets as a source of outsized returns and a means to tamp down risk.

But even among HNWIs who are private banking clients, access may remain restricted to the most wealthy, particularly for high-ticket assets such as real estate and infrastructure which may require millions of dollars to participate.

The good news is there are regulated platforms today that harness blockchain technology and smart contracts to fractionalise the assets, reducing the investment size to as low as US$10,000 or less.

These platforms include ADDX (formerly called iSTOX), Fraxtor and SDAX Exchange, which is backed by ARA Asset Management and The Straits Trading Company. Investors who wish to participate in the products on the platforms will need to qualify as accredited investors.

DBS Digital Exchange (DDex) is yet another platform for the trading of not just crypto currencies but also asset-backed tokens. The first security token on DDex was a S$15 million DBS digital bond listed last June. Other assets are understood to be in the pipeline. Possibilities may include the tokenisation of shares and debt of Singapore private companies, and real estate.

As at end-October digital assets under custody with DDex exceeded S$600 million, triple the amount recorded in September.

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Market uncertainties may whet appetite for private asset investing. The prospect of higher inflation and higher interest rates is putting pressure on valuations of fixed income and public equities.

Clients are also told to brace for lower secular returns from public markets going forward. This has intensified the quest for assets that can deliver ''alpha'' or returns above the market, and serve as portfolio diversifiers to boot. Historically, private assets deliver on both counts - returns are higher than public securities, and correlations with public markets are also low or negative.

Preqin expects assets under management (AUM) in private capital to grow from an estimated US$8.9 trillion as at end-2021 to US$17.7 trillion in 2026, a compound annual growth rate (CAGER) of 14.8 per cent. Private equity takes the largest share of the pie; its AUM is expected to grow from US$5.33 trillion to US$11.12 trillion, or a CAGR of 15.9 per cent. However the fastest CAGR of 17.4 per cent, is expected from private debt, taking its AUM to US$2.69 trillion by end-2026.

Based on Preqin data the median annualised net IRR (internal rate of return) for private equity funds in the five years to March 2021 is 18.8 per cent. The IRR of private debt funds in the 3 years to March 2021 is estimated at 4.8 per cent.

PRIVATE banks typically offer clients participation via private equity or debt funds on their platforms. Clients may also invest directly in private companies or participate in pre-IPOs. Banks also offer co-investment opportunities in assets like real estate. This route, however, is likely to require capital in the millions of dollars. In either funds or direct investments, clients will also need to be prepared for illiquidity and capital calls. The lock-in period may be as long as 8 to 10 years.

Benjamin Cavalli, Credit Suisse head of wealth management, says: ''We have seen very strong demand from our clients for solutions that provide differentiated return drivers and can help diversify their portfolios... We're also witnessing an acceleration in the shift from public to private markets. As public market yields remain compressed, investors are drawn towards private and alternative markets (for) higher yields and also with a view to inflation risks.''

KELVIN Tay, regional chief investment officer of UBS Global Wealth Management, says: ''Interest in private markets has been consistently building up over the past 5 years, spurred by the publicity around tech startups and SPACs.''

Bank of Singapore's head of investment strategy Eli Lee notes that private assets and alternative investments can help in today's environment. ''Real state and infrastructure, for example, help in inflationary conditions. Private debt is also popular as a way to capitalise on rising interest rates and generate superior income streams. The current market turmoil also calls for greater activism and being more nimble in trades...''

Steve Brice, Standard Chartered Wealth Management chief investment officer, expects private assets to outperform public assets by 2-3 per cent over the long term. ''Private equities have generally achieved returns above public equities over the long run; unlevered real estate returned somewhere between stock and bond returns, and private debt typically outperforms high yield bonds.''

Upstarts like ADDX, Fraxtor and SDAX are opening up more options for the lower-to-mid tier of wealthy clients, who may not be able to allocate millions of dollars to a single investment. The digital asset platforms are regulated by the MAS. ADDX chief commercial officer Choo Oi-Yee believes there is an untapped market under-served by private banks. ''When this opportunity came about it was very fascinating. I can see a space where this may play out - the clients with S$2-20 million in assets who don't see the full shelf of private market products.''

SO far ADDX has gained traction. To date there have been some 25 listings on the platform and volume of over S$200 million. These listings comprise a range of assets, including a private equity fund by the Partners Group; TCM Digital Asset Fund; and SeaTown Private Credit Fund.

ADDX recently announced the sale of a portfolio of logistics real estate under Elite Logistics Fund I listed on the platform. The 520 million euro sale to Blackstone has enabled the fund to achieve more than twice the indicated rate of return of 12 per cent.

Fraxtor specialises in tokenisation of real estate. Co-founder and group managing director Oliver Siah says the platform has raised over S$30 million for various projects since inception. Its listing of 21 Mount Rosie Road, a landed property to be redeveloped into multiple detached, semi-detached and terrace houses, was fully subscribed within 90 minutes.

Fraxtor was co-founded by Rachel Teo, director of the Daniel Teo group of companies, and backed by property tycoon Daniel Teo himself, who is investment adviser on the listing committee. Listings include developments in Singapore and Australia.

Says Siah: ''In the first half of 2022, we are on track to exceed S$50 million... Investors are becoming more open to the concept of tokenisation. Most investors now focus on the merits of the deals instead. Tokenisation is merely a means to participate in the investment and in the future, investors can potentially unlock some liquidity in a regulated digital asset exchange.''