Fund focus: Azalea embraces equity with fund-of-funds offering

From the outset, Azalea Asset Management’s remit has been to broaden investor access to private markets. Having initially achieved this through debt-based structures – and gradually moving from targeting high net worth individuals to mainstream retail investors – the firm is now offering direct equity exposure through fund-of-funds products.

Azalea, which is wholly owned by Singapore government investment fund Temasek Holdings, closed its debut fund-of-funds last week with commitments of $650 million, surpassing the $450 million target. Altrium Private Equity Fund I will invest in a mixture of primary and secondary funds, with an emphasis on buyout and growth strategies. While the geographic focus is officially global, most of the capital will go to US and European managers because these tend to be beyond the reach of a predominantly Asian LP base.

“It’s a natural segue from our Astrea bond program,” En Yaw Chue, a managing director and head of private equity funds at Azalea, tells AVCJ. “We found that investors [in the bond program] were asking more intelligent questions. They wanted to know about the equity tranche launch because they were no longer interested in the bond program – they wanted something that was higher return and higher risk, with direct exposure.”

The Astrea series began in 2006 and completed its fifth iteration earlier this year. They are essentially structured secondary transactions that offer exposure to existing funds in the Temasek portfolio. It wasn’t until Astrea IV that a portion of the bonds were allocated to retail investors, but by the close of Astrea V in June retail demand was at record levels.

The $600 million collateralized fund obligation (CFO) comprised S$315 million ($230 million) in class A-1 bonds, $230 million in class A-2 bonds, and $140 million in class B bonds. Azalea placed S$135 million in class A-1 bonds to accredited investors and then marketed the remaining S$180 million to retail investors. These bonds now trade on the Singapore Stock Exchange. Nearly 31,000 applications were received from retail investors, with three-quarters of the offering going to those who wanted less than S$50,000.

For the first Altrium product – which is a blind pool fund, not a set of preselected secondary position – Azalea restricted high net worth participation to accredited investors. There are three obstacles it seeks to overcome on behalf of this mass affluent target market. First, minimum commitments to PE funds tend to be in the $5-10 million range, so the entry-level equity check for Altrium was set at $200,000. Second, the blend of primary and secondary is intended to address concerns about the j-curve effect. Third, the lifecycle of the fund is shorter than the 15-20 years for most fund-of-funds.

Azalea used a private bank to market Altrium to accredited investors. However, they are said to account for only half the overall corpus because there was also strong interest from institutional investors. Commitments came from endowments, foundations, and family offices as well as from high net worth individuals.

“Fund-of-funds are seen as quite mundane. We were pleasantly surprised by the warm reception we received, not just from individuals – I thought it would be 100% individuals at first – but also from traditional institutional investors,” says Chue. “If you have well-thought-through product features and design, you will be able to attract investors who are traditionally not in this space.”

Azalea plans to continue with its product innovations, building on the trust it has established among investors through the Astrea series and leveraging its relationships with GPs to get allocations for difficult-to-access funds. However, the future will not necessarily be limited to private equity. Anything within the private markets space – Chue cites credit as an example but declines to the prospective product pipeline – is regarded as a potential target.

“We hope that, through of our offerings, alternatives will form part of an individual’s personal financial planning,” he adds. “They can have public equity, bonds and then a sliver of private markets through our programs.”

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• Topics
• Southeast Asia
• Fundraising
• Fund-of-funds
• Singapore
• Temasek Holdings
• Azalea Asset Management