Accreditation measures the balance sheet, not the investor

EACH year, a larger number of Singapore professionals cross the “accredited investor” threshold.

What follows is a significant expansion of the investable universe, taking in private equity and venture capital, private credit, and customised structured income. It is a material change in what a portfolio can hold.

The appetite is well-established. Alternatives accounted for 12 per cent of high-net-worth portfolios globally at the start of this year, indicated Capgemini’s World Wealth Report, and more than two-thirds of those investors said they intended to increase their private equity exposure.

Eighty-eight per cent work with more than one wealth manager specifically to improve their access to alternatives. Investors have identified where the opportunity sits and are putting real effort into reaching it, but what follows access is less examined.

It is worth being precise about what accreditation measures: net personal assets above S$2 million, with the primary residence contributing no more than S$1 million of that figure; or income of at least S$300,000 over the preceding 12 months; or net financial assets above S$1 million.

Each is a balance sheet test and each does its job, which is to establish that an investor can absorb a setback without it being ruinous.

None of them establishes whether the holder can read a capital account statement or tell a strong private credit fund from a crowded one.

That is not a criticism of the framework, but rather, it marks the point where the regulator’s work ends and the investor’s begins.

Among the opportunities that open up are private equity, private credit and structured products. Each carries its own risks, liquidity considerations and potential role in a portfolio. Access to them is not the same as knowing what to do with them.

The real work is in deciding where each piece belongs, how much of it to hold and what it is meant to achieve.

Asset access

The case for private equity is well-understood. Companies now stay private for well over a decade, so a growing share of value creation happens before a listing.

These funds are also exempt from the full prospectus requirements that apply to retail offerings, which is what allows them their flexibility and leaves more of the diligence with the investor.

The complication is that headline returns don’t reflect the whole picture. An internal rate of return says little on its own. Vintage year matters and manager dispersion in private markets is typically wider than in any public asset class.

Manager selection is therefore critical, and increasingly difficult as more funds and newer managers become available.

Assessing the team, its track record, investment discipline and performance across different market environments matters as much as deciding to allocate to private equity in the first place.

Private credit has grown quickly and for clear reasons. The income is contractual rather than dependent on an exit; most of it is floating rate; and the loans typically sit senior in the capital structure.

Those characteristics mean private credit can play an income-oriented role alongside traditional fixed income, and they also set the terms for what to look at.

Return depends on underwriting discipline and on how a manager behaves when a borrower comes under strain. And the vehicle matters as much as the strategy.

Semi-liquid and evergreen structures offer periodic redemption against loans that run for years, so the redemption terms deserve as much reading as the track record.

Fixed-coupon notes and related structures have become a common income solution for accredited investors in Singapore, and they work well when the mechanics are understood.

The coupon is an output rather than a rating. Yield rises when the underlying stocks are more volatile; when low-correlation names are combined so that one is more likely to breach; when the downside barrier sits closer to the starting price; and when the issuer holds the right to call the note early.

The essential point is that the headline rate is not a quality rating. It is the price of the risk being taken. A note paying 12 per cent is not better than one paying 8 per cent. It reflects a different set of trade-offs.

It is also important to note that an investor is relying on the issuing bank’s creditworthiness for the full term, and selling before maturity is difficult, so the money committed should be money that can stay in place.

Core and satellite still underpin

A central discipline runs across all of these asset classes: Size a position according to how long the money must stay put.

Capital may be called on the fund’s schedule rather than the investor’s, and liquidity terms are generally less flexible than those of traditional instruments.

Positions sized on that basis can be held through a full cycle, which is the condition under which any of these returns actually materialise.

The framework wealth managers often use for their clients is reasonably straightforward. A core holds the diversified, long-horizon foundation across global equities, fixed income and a measured allocation to private markets.

A satellite strategy, typically 20 to 30 per cent, carries the tactical positions and yield structures. Accreditation adds to both rather than replacing either.

A private credit fund earns a place in the core on the strength of its income and lower correlation to public markets. A venture fund or a note linked to two technology stocks belongs in the satellite, because each expresses a conviction and should be sized as one.

Holding that distinction is what keeps a portfolio healthier when markets shift substantially.

Some of these considerations will likely soon face a wider investor group in Singapore.

The Monetary Authority of Singapore has consulted on a long-term investment fund framework that would give retail investors regulated access to private equity, private credit and infrastructure.

Comparable structures already operate in the United Kingdom, the European Union and, through retirement plans, the United States.

Extending access is a reasonable response to where value is now being created. What none of those frameworks does is teach an investor how to compare two managers, or judge what a holding is really worth.

Disclosure requirements help somewhat, but are no replacement for developing a fundamental understanding of different asset classes and how they interact in an individual portfolio.

The writer is Singapore chief executive officer and global head of partnerships at Arta Finance