Family offices rethink appeal of private markets
Some family offices are becoming wary about investing in private markets, even as many other asset owners continue to pile into these alternative asset classes.
The biggest attraction of these assets has been the returns, but given recent turbulence of public markets, staying nimble with selective and tactical plays may be the best strategy in the current economic environment, Singapore-based family offices told AsianInvestor.
Given the complexity and illiquidity associated with private markets, staying nimble with selective and tactical allocations may be the best strategy in the current economic environment, experts told AsianInvestor.
“We have actively avoided adding to private markets over the past 18 months. The main motivation behind such a move is the rapid increase in risk-free rates and a reluctance (or lack) of private markets’ corresponding adjustment in multiples/valuations”, said Bobby Koh, investment director at Singapore-based single family office Panoramic Capital.
“We think private investments currently in their 4th to 6th year vintage will struggle to achieve meaningful exits, weighing on private markets for some time yet.
"Being a relatively new and modest setup, we have adopted a slightly conservative tilt. This has helped us avoid certain catastrophic losses that have affected some of our peers,” he told AsianInvestor.
Other family offices have echoed this wariness: Singapore-based KMXK Investment said it is wary about private debt as an investment option for now.
KMXK Investment
Jeremy Lim, KMXK chief investment officer said that “several single-family offices are choosing to hold more cash and treasury bills in their portfolio. This strategy reflects a belief that maintaining liquidity is paramount in the current investment climate.”
In times of turbulence, the liquidity of public assets allows investors to swiftly reallocate funds and capitalise on emerging opportunities, or mitigate risks, without being constrained by longer exit timelines associated with private assets.
PUBLIC VERSUS PRIVATE
After a tumultuous 2022 when both public stocks and bonds lost almost one-fifth of their value, several investors have sought refuge -- and returns -- in private assets.
“Such resilience is merely an illusion because the private investment is unable to be marked to market correctly due to various constraints (liquidity, lock-in to name but two). If such constraints were removed, would these investments retain or hold up the value it was originally bought for?” noted Panoramic Capital’s Koh.
Harry Pang, founder of Fountainhead Partners, a multi-family office, said that private equity funds such as buyout funds, growth funds, and real estate funds were beneficiaries of the past 25 years of globalisation and an easy interest rate environment.
Now that the backdrop has reversed, investors can no longer expect easy returns.
Studies show that between PE and liquid assets, multiple returns for PE investments are typically much worse than liquid assets, he said.
“Furthermore, studies have shown investing in PE/VC is only profitable if invested in top quartile funds, but top quartile funds are usually only discovered in retrospect.”
“Our families look at the total asset’s multiple returns over a three to five-year cycle, " Pang said.
"The net return of a typical 10-year lock-up fund should return at least 2X. The current 10-year US Treasury yield yield of 4% plus a 4% illiquidity premium would get a 2.16X multiple return over 10 years."
SELECTIVE PICKS
Still, while some family offices remain wary about wading into private markets, others see selective opportunities offering attractive yields.
“The private debt space looks interesting as banks tighten lending conditions and more firms find it difficult to obtain financing. GP (general partner) stakes strategies also present a very interesting opportunity to capitalize on an environment of more uncertainty from asset managers, and one that can produce an attractive yield on top of capital growth,” Leo Lum, investment manager at Khattar Holdings, a single-family office said.
GP stakes strategy – investing in the management companies of private equity and alternative asset firms – is a strategy hat KMXK Investment also finds interesting and sees emerging opportunities.
Panoramic Capital’s Koh said that conversations with peers and other experts suggest that single family offices are leaning towards investing in private debt if they are mulling private market investments. “
This seems to be an extension of being overweight fixed income in public markets a general consensus trades this year," he added.
Fountainhead Partners’s Pang said that distressed opportunity funds in the US are another interesting play. “We suspect the current US economic strength is not sustainable, and a lot of the covenant-light debt will come home to roost.”
The multi-family office is recommending that clients steer clear from blind pool funds with long duration. “Not reporting volatility doesn’t mean volatility doesn’t exist,” he added.
Other alternative strategies include insurance linked securities, and litigation finance to more exotic investments like spirit barrels and distillate, said Khattar Holdings’ Lum, adding that these investments however, require time and effort in understanding how these markets work.