Temasek unit launches bonds backed by private equity funds

A man walks pass the Temasek Holdings office on Feb 16, 2015.
A man walks pass the Temasek Holdings office on Feb 16, 2015. PHOTO: ST FILE

A unit of Singapore investment company Temasek Holdings has launched new bonds that could pave the way for retail investors to put funds into private equity.

The US$500 million (S$680 million) issue of listed bonds is backed by a portfolio of 34 private equity funds.

The move comes on the back of previous efforts by Temasek to broaden the investor base in its private equity holdings. It is not intended as a fund-raising exercise, The Straits Times understands.

While this bond issue is available only to institutional and accredited investors, the longer-term goal is to structure a product targeted at retail investors.

The bonds are based on a portfolio of 34 private equity funds, including funds managed by industry heavyweights such as Blackstone Group, KKR, TPG Capital and Warburg Pincus.

These private equity funds are invested in more than 590 companies across sectors such as healthcare, consumer, industrials and IT, among others.

The portfolio was valued at US$1.1 billion as of the end of March, of which US$500 million - or about 45 per cent - will be funded by bond holders.

The product, the first of its kind in Singapore, will be issued by a vehicle called Astrea III, a wholly owned subsidiary of Astrea Capital. Astrea Capital is, in turn, a unit of Azalea Asset Management, which is an indirect wholly owned subsidiary of Temasek.

Astrea Capital will retain the remaining 55 per cent of the portfolio as an equity stake, which provides an additional layer of protection for bond holders as they rank above equity holders in the event of a default.

The issue is split into four classes of bonds targeted at investors with different risk and return profiles.

The bonds are supported by cash flows from the private equity funds, about 67 per cent of which are focused on the United States, 21 per cent on Asia and 12 per cent on Europe.

The Straits Times understands that yields have not yet been determined, and will be worked out in the coming weeks as part of discussions with potential investors.

Investors will have to put in a minimum of $250,000 or US$200,000, depending on the class of bond they invest in - much less than the usual US$1 million to US$2 million required to invest in a private equity fund.

Private equity investing has traditionally been the preserve of institutional and accredited investors who have higher tolerance for risk. In recent years, the growth of private equity has outpaced that of other asset classes as investors have been drawn to it for its returns.

Mr Terence Lin, assistant director of bonds and portfolio management at iFAST Corporation, said notes in Astrea III's highest, Class A-1 tranche are "considered really safe... the underlying private equity investments would have to suffer a very significant loss for the bonds to be impaired".

This story has been updated for clarity.

A version of this article appeared in the print edition of The Straits Times on June 07, 2016, with the headline 'Temasek unit launches bonds backed by private equity funds'. Print Edition | Subscribe