Private equity bonds gained traction as investors seek to diversify portfolios: Azalea

Claudia Tan HS

Published Thu, Jan 20, 2022 · 08:49 AM

PRIVATE equity (PE) is an increasingly attractive asset class as investors seek to diversify their portfolios, said Margaret Lui, chief executive officer at Azalea Asset Management.

"Besides that, historical numbers have shown that private equities have outperformed public equities," said Lui in a virtual conference on Thursday (Jan 20).

Asset under management of PE funds grew to US$7.6 trillion as at June 2021, Azalea shared during the conference.

Azalea, an indirect subsidiary of Temasek Holdings, seeks to democratise access to PE for retail investors, in a bid to help enhance their long-term savings.

To date there have been three issuances with listed retail tranches: Astrea IV, Astrea V and now Astrea VI. There are also other products such as Altrium for accredited investors to co-invest with Azalea for access to private equity funds globally.

"With strong investor interest in PE, many PE managers were raising larger funds over the past year. This has kept dry powder on a steady upward trend, reaching US$1.2 trillion in 2021, increasing the total capital available or dry powder for PE investments in the market," said Azalea's chief investment officer Chue En Yaw.

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

The significant amount of capital available in the PE market has kept PE buyout valuations elevated. The buyout multiples in the US stood at 12.8 times in 2021, above the median of 12.2 times since 2010, Chue noted.

"Notwithstanding the high priced market environment, many PE funds including those in the Astrea portfolios have taken advantage of the positive market environment to monetise their investments, generating strong distributions back to the investors," said Chue.

Buyout exit activity had accelerated since the pandemic eased. Given that Astrea PE bonds are backed by cash flows generated from their respective PE funds portfolio, bondholders had benefited from the the strong PE liquidity, said Chue.

The portfolios had seen strong fair value gains and healthy cash distributions, with loan to value ratios kept well below the maximum of 50 per cent across all Astreas last year. Strong cash distributions also meant there was no need to utilise any bank facilities, Chue said.

The latest Astrea VI that began trading on the Singapore Exchange in March last year, for instance, generated healthy cash distributions of US$309 million or about 21 per cent of its starting portfolio net asset value.

While Astrea VI carries a lower interest rate than earlier issuances, the Class A-1 bonds of the issuance were 3 times subscribed, in part due to the hunger for yield amid a low-rate environment.

But even amid incoming rate hikes and tapering, there may still be a healthy appetite for bonds given that demand is largely tied to the needs of an investor.

"It is for the investors to decide whether they would want to have more bond investments at any point in time - whether in a rising rate or a decreasing rate environment. It really is about portfolio allocation," said Lui.

CIMB Private Banking economist Song Seng Wun, who was invited to speak at Azalea's virtual conference, said that the stage of life in which an investor is at plays a significant role in determining their risk appetite.

"Obviously, when you're starting out, you can have a portfolio where you can take a bit more risk," said Song, adding that individuals in a later stage of their life might focus on a more balanced portfolio with lower risks.

Song is also anticipating interest rate hikes as well as tapering to be "far more gradual".

While the record low interest rate environment is now behind us, Song said that any increments would not be too drastic given that it is coming from a low base of near-zero.

This is unless global growth is significantly stronger than what is being projected, he added.

Meanwhile, SPACs (special purpose acquisition companies) will serve as an additional exit route for PE fund managers. Some of Astrea's portfolio companies had exited because the underlying companies were sold to SPACs, according to Chue.

"SPACs are an avenue for private equity to get their liquidity by listing them on exchange. So this really enhances the options available to PE fund managers, who traditionally would do it through a regular IPO or a strategic sale to another private equity fund," said Lui.

The Singapore Exchange may soon welcome its third SPAC listing this month, with Novo Tellus Alpha Acquisition registering its final prospectus on Thursday (Jan 20). The 2 other SPACs are Vertex Technology Acquisition Corporation which had made its trading debut and Pegasus Asia that is set to commence trading on Friday (Jan 21).

READ MORE:

Private equity Bonds Wealth & Investing

Reuse this content Feedback