Altrium PE fund of funds a hit among high net worth clients

Singapore

IN a quiet launch last year, Azalea Investment Management, a subsidiary of Temasek Holdings, hit yet another milestone in its continuing efforts to innovate in the structuring of private equity (PE) funds.

The firm attracted capital commitments of US$650 million for Altrium Private Equity Fund I over three months to early December, its first fund of funds product targeted at the accredited investor market.

The fund had initially set a target to raise US$400 million. This may well be among the largest fund raisings by a private bank for PE.

For the private client segment of investors, Azalea worked exclusively with Credit Suisse. Investors also included institutions such as family offices, endowments and foundations.

Bernard Heng, Credit Suisse's managing director (strategic advisory and private asset group), said: "We were prepared for a long road show ... The momentum was something we hadn't seen before. Very soon, we knew we were at the hard cap. We could re-open (for fund raising), but we thought this is the inaugural fund. We can go back to the market frequently because the idea is for investors to invest regularly. This is an excellent solution for retirement planning."

The fund of funds portfolio is expected to be invested in PE funds across the US, Europe and Asia, focusing on buyout and growth strategies. The internal rate of return is expected to be in the low to mid-teens.

Over the past few years, Azalea has made its mark with innovative structures under the Astrea platform, to "democratise" PE for the retail investing public.

PE is typically accessible only among institutions and high net worth clientele who can afford high investment minimums and a long period of illiquidity. The lock-in period is typically around 10 years, but may be as long as 15 years.

But even if an ultra wealthy individual can afford the high investment minimum for a single PE fund, access to the best managers with a credible track record remains a challenge.

Altrium's success is partly due to the investor confidence inspired by Azalea and its Temasek parentage.

Under the Astrea platform, Azalea has successfully structured portfolios of PE funds into investible bonds listed on the Singapore Exchange, with structural safeguards to ensure that the coupons and principal would be paid as projected.

By listing the bonds, the firm gave investors liquidity as well. Between 2018 and 2019, the firm raised US$501 million and US$600 million for the Astrea IV and V asset-backed securities, respectively. Both had tranches for retail investors with investment minimums set at S$2,000, unheard of in the PE space.

It is Azalea directors' firm belief that PE has a place in retirement portfolios as it offers higher returns over the long term and lower correlations to traditional asset classes such as stocks and bonds.

Said Azalea chief executive Margaret Lui: "Over the long term we aim to be a regular issuer in order to entrench our product. We're picky about our portfolio. It's about taking leadership to make sure the market is entrenched with high quality products, and in doing so people will look to the same high standards."

For Altrium, the firm sought to overcome a number of hurdles that still prevent private clients from investing in PE. One is access to managers. A second is concern over a long holding period.

BT understands Altrium puts together a portfolio of PE funds by renowned names in the PE industry, which overcomes the challenge of access.

Ms Lui said: "Good general partners are very hard to access even for institutions like family offices. There is huge demand for high quality managers. Even for larger institutions, (getting access) is not that easy.''

Chue En Yaw, Azalea managing director and head of PE funds, said: "We know there is unmet demand from the high net worth perspective. We spent a lot of time thinking about how to design a product that overcomes the barriers of investing in PE. They don't like the long investment horizon of up to 15 years. They want to invest with someone they trust and they want access to good quality managers."

It also sought to shorten the J curve associated with PE. The J curve refers to a pattern in PE where in the early years of a fund, returns are poor or negative due to investment costs and the time needed for underlying investments to mature.

Returns typically trend upwards after the fourth year. For Altrium, Astrea is investing a portion into secondaries - that is, existing PE funds in the secondary market which are expected to make distributions sooner than primary funds. This helps to shorten the overall J curve.

There are also efforts to allay concerns over an extended fund life. From the seventh anniversary of the fund onwards, one or more of the manager's affiliates have the option to buy the fund's entire portfolio, subject to certain conditions.

Investors are also told at the outset the funds that Altrium will be invested in, including the secondaries.

"You have visibility on the seed portfolio which is not typical for a FoF client. Clients can see the funds we start with coupled with the secondaries, so it's less of a blind pool," said Mr Chue.

Azalea is investing its own capital into Altrium.

He added: "One of our key philosophies is we invest in our own product to create alignment with investors. I'm happy that we were able to achieve two things. One is that some institutions that invested with us are first-time investors in PE; this is their first step into alternatives. Two, we kept the minimum investment amount at US$200,000 to reach out to more individuals. Our vision is to bring this down even further."

Another hurdle for PE investors is that the schedule of capital calls may be uncertain, which makes it a challenge to manage their cash flow.

Mr Chue said: "We tell investors upfront that we will do a periodic drawdown. This means we make a capital call every nine to 12 months ... To make it easier we communicate to investors ahead of time a projected amount to be called, and we hope to draw down around the same amount every year."

Credit Suisse helps clients to manage risk by advising on the appropriate size of the investment relative to a client's net worth and total portfolio.

Mr Heng said: "You may have US$20 million with us but US$50 million elsewhere. Understanding the illiquid part of a client's portfolio is very important. If an investor has US$20 million and wants to invest US$2 million ... we would raise queries such as - have we explained the liquidity portion of the investment profile sufficiently? Does the client understand that there is potential concentration risk? The bedrock of risk management is sizing versus the portfolio size and overall wealth."