Family office PCH seeks focused risk amid private debt ‘red flags’
The Asian investment office for Italy’s 900-year-old Spinola family is taking measures to navigate potential turbulence in private markets and geopolitics.
The head of Singapore-based Proprietary Capital Holdings (PCH) said it planned to develop a trade screening and execution platform with a US specialty finance boutique, in which one of its funds holds a small stake.
It is also moving to deepen ties with other external managers, PCH chief executive Roxanne Davies told AsianInvestor during a rare and wide-ranging interview.
PCH
These moves come amid rising concerns for PCH over the big wall of money flowing into private debt and the volatile geopolitical landscape. But they also provide insight into the Spinolas’ long-standing and global strategy of making targeted investments through trusted partners.
Last year, one of PCH's funds had acquired a small piece of the US boutique, New York-based Alternative Capital Investments (ACI), after focusing on variations of specialty finance in its core portfolio strategies, said Davies.
"They [ACI] are managing significant portions of their own assets side by side with clients, which include many leading hedge fund managers."
The investment manager targets hard-to-structure deals, Davies added, and currently sees the most opportunity in private debt, though it stays away from “over-heated areas”.
PCH can also focus on equity or other verticals, she added.
Explaining how this fits into PCH's broad investment strategy, Davies said: “We’re not in the business to ‘spray and pray’. We prefer to take focused risk. We know we can't do everything. So we are hoping to have a deeper relationship with this group [ACI] and a few others.”
PCH became a licensed investment company in the Lion City in 2019 and has set up a Singapore variable capital company (VCC).
This came after the Spinolas' Asian office was originally founded as Parly Singapore in 2011, with Davies as managing partner, in an early wave of European families putting investment operations in the region.
PRIVATE DEBT “TIME BOMBS”?
PCH is very much a global investor across the risk spectrum, giving it a lot of flexibility to respond to market trends or issues, such as the recent boom in alternative credit.
“As much as we have liked private debt for years, we now see some red flags,” she explained.
“As soon as institutional money floods into alternative niches, we prefer to move away. There's a tsunami of money hitting this market, and there isn't a tsunami of opportunities.”
Davies pointed to growing “cross-collateralisation” between private equity firms and asset owners or asset managers and/or other lenders.
Financing strategies based on subjective marks, such as net asset value (NAV) lending, “are potential time bombs waiting to happen”, she said, though any such blowups “could play out over several years”.
On a geopolitical level, meanwhile, a confluence of events – including conflicts like those in Gaza and Ukraine, growing tensions between China and Taiwan, and the upcoming US election – is contributing to huge uncertainty.
“We would prefer to protect the downside risks in these environments,” said Davies.
That is in keeping with PCH’s general approach. “When I look at an external manager,” she said, “the way they manage risk is probably the first thing I look at, before a variety of other things.
“In a zero- to low-interest-rate environment [in the decade or so after 2008] we wanted – and got – high-single-digit annualised, compounded returns. The reason for that is we don't have double-digit losses.”
IN-DEPTH MANAGER DILIGENCE
With all this in mind, PCH tends to seek managers offering safe and liquid strategies, with a strong alignment of interest and, in the past few years in particular, a strong focus on risk management.
A typical approach for PCH is to seed or acquire parts of asset managers, said Davies, “because that way you get an enhanced IRR [internal rate of return], you have different types of potential revenue streams – you are essentially buying not building.”
Such a strategy requires substantial research. It can take a long time – sometimes as much as a year – to carry out diligence on managers, she said.
“Once we have found a partner with an interesting product, we really work on understanding the risk and the manager, as if we are the manager. If we gain that level of insight on them, we might help them raise assets within our network of clients or, more importantly, develop strategies with them that suit our portfolios.”
“We have identified a few managers that we deem safer than most fixed deposits but play in the 7–9% return rate,” said Davies. “This is not usually of interest to most family offices in Asia, but I do like the safe liquid nature of the product.”
As an example of another firm that PCH has been working with, she cited Colchis Capital, which invests in equity and debt in US residential real estate.
The San Francisco-based manager was founded in 2005 on the premise that the market had structural credit issues and bought short subprime portfolios, Davies said.
After the success of that trade thanks to the subprime market crisis that hit in 2007, Colchis also profited from purchasing distressed residential mortgage-backed securities.
The firm also saw supply issues in residential homes in certain states and has purchased properties to rent, she added. “So they have operations around the US and understand the market better than most.”
This story has been updated in the second and fifth paragraphs.