For investors looking to diversify beyond public markets into the alternative investment universe, private equity (PE) and venture capital (VC) are attractive propositions.
PE and VC offer a greater depth of opportunity by opening up stages of the company lifecycle – venture, growth, buyout – not available to investors in listed stocks. As global economic growth increasingly migrates into the private realm, a rising number of funds, high-net-worth individuals, family offices and other investors are looking at PE and VC as a means of accessing upside that they would otherwise miss by waiting for companies to go public.
Historically, the returns from PE and VC have outstripped those from benchmark stock indexes. Between 2000 and 2020, for example, private equity in the U.S. recorded an annual average return of 10.5%, outperforming the S&P5001.
The outlook for PE remains bullish, both within Asia-Pacific and globally. PE fundraising is forecast to reach an all-time high in 2021, and so-called “dry powder” in the Asia-Pacific region grew 22% between 2019-2020.2 Despite the pandemic crisis, Asia-Pacific saw a surge in high-profile deals in 2020, such as the USD8.7 billion privatisation of 58.com in China, and Blackstone’s USD2.3 billion takeover of Takeda Consumer Healthcare.3
Fertile ground for innovative investments
Similarly, venture capital has found fertile ground as economies revive and adapt. The forces of creative disruption accelerated by the pandemic triggered a wave of funding opportunities and the value of VC deals – which typically support innovative, early-stage companies – reached a record USD147.9 billion worldwide in 20204.
“In an environment where change is constant, it is extremely important that investors future-proof their portfolios by allocating to segments of the economy that are driving innovation and change,” said Chee Jiun Wen, Head of Private Markets and Alternatives at Bank of Singapore. “Investing in PE and VC allows them to access these segments of the economy.
“The IPO landscape has been changing, with companies now considering going public much later in their lifecycle. This has meaningful implications for investors, as it means that they are no longer able to access the same value-creation and growth of companies through the public markets. Hence, PE and VC investments are almost a necessity for investors in order to participate in a larger chunk of a company’s growth.”
As stimulus and bailout packages in many cases postpone the economic pain of the pandemic, businesses that are backed and well-funded by private capital are likely to thrive more than public companies forced by the crisis to mend damaged capital structures.
However, investors wanting exposure to private equity or venture capital face a number of significant challenges. Firstly, a PE or VC investment is a substantially more complex undertaking than buying shares in a listed company, requiring a considerable commitment of time, resources and expertise.
On top of that, investors must be ready to accept the long-term illiquidity of their capital, rigid timelines and the potential for issues such as limited transparency and opaque valuations which can be overcome albeit with a need for specialised resources to monitor.
A co-investment boom
To add to the complexity, global investors are increasingly looking to co-investments as a tactical portfolio construction tool, and to enhance returns. Co-investment activity is estimated to account for almost 20% of global private equity markets5, and a recent Economist Intelligence Unit survey found that close to half of institutional investors identified co-investment as the best current private-equity opportunity, with Asia offering the most attractive regional potential.6
While co-investment offers the lucrative opportunities of private-equity without the fees often associated with PE funds, smaller investors are frequently locked out of such deals.
“Co-investments are increasingly being used by large institutional investors as a tool to complement their private-market fund portfolios, as it allows them to customise their portfolios and tactically increase exposure to certain sectors that they might favour and/or to accelerate capital deployment to meet their target allocation,” said Chee.
“Institutions have also been drawn to co-investments for its potential to generate outperformance at reduced cost, but this has historically been a luxury that only the very large institutions can afford. Bank of Singapore wants to bring this luxury to our individual investors.”
As the PE universe expands and becomes more complex, sourcing a high-quality deal flow and the expertise required to select, evaluate and execute those deals is becoming more of a challenge.
Access to institutional-quality venture, growth and buyout deals
Bank of Singapore, which is headquartered in Singapore, has access to global and regional fund managers, offering exposure to a diverse range of assets and sources of return. This broad access opens up sought-after institutional-quality venture, growth and buyout deals around the world, buttressed by the bank’s multi-layered approach to due diligence.
With a deal-flow reach that spans strategies, sectors and geographies, investors can tap into secular growth trends – such as global technology and healthcare growth investments, and China new-economy investments. Bank of Singapore also leverages geography and sector specialists for value creation – such as European buyout funds or technology-focused venture capital investing in tomorrow’s winners.
Additionally, the bank can provide direct access to co-investment deal flows.
“We are doing so through the creation of a co-investment platform called Bank of Singapore Private Ventures that connects top-tier private market managers with co-investment deal flow and our clients,” said Chee. “This platform removes the key barriers of entry that our clients might face when it comes to direct investments: Access, Due Diligence, Deal Execution and Post-Investment Value Creation/Monitoring.
“We believe that to successfully invest in PE and VC, manager selection is crucial, and takes priority when building a private-markets portfolio. Hence, our approach is predominantly bottom-up but we remain informed by macroeconomic trends to augment our sourcing process.”
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