Singapore single family office cautious on private debt
Singapore-based single family office KMXK Investment believes investors must be cautious while investing in private debt, amid a tighter lending environment and general lack of transparency of what goes on in this market, even as it promises attractive returns.
“In view of the tighter lending environment and the lack of transparency associated with private debt, we approach the investment with caution”, said Jeremy Lim, chief investment officer at Singapore-based single family office KMXK Investment.
“However, if we were to explore private debt investments, “our preference would lean to developed market private debt”, he told AsianInvestor.
“This inclination is driven by the stronger governance structures, well-established legal frameworks, and robust reporting mechanisms typically found in developed markets.”
He stressed the family office is highly selective about making investments in this space: “We take the time to thoroughly understand the nature and specifics of each private debt opportunity before making any investment decision,” he said, noting that not all private debt investments are equal.
CHANGING SENTIMENT
The $1.4 trillion global private debt market has grown rapidly over the past decade and is projected to reach $2.3 trillion by 2027, according to alternative assets data tracker Preqin.
The interest in private debt, albeit selective, is not new: “Single family offices worldwide are venturing further into private debt. This is no surprise as compared to private equity or venture capital, private debt is often considered less risky,” said Kevin Teng, CEO of WRISE Wealth Management Singapore.
AsianInvestor reported earlier this year that as the global economy gears up for higher rates for longer, private debt and real assets are becoming even more popular among institutions. That trend is being reflected among family offices as well.
There is evidence that in recent months many investors are also turning selective on this asset class.
As the economic outlook turns murky, several single family offices are also choosing to hold more cash and treasury bills in their portfolio, Lim said. “This strategy reflects a belief that maintaining liquidity is paramount in the current investment climate.”
KEY CONSIDERATIONS
Private debt for sophisticated investors is typically considered a viable option under fixed-income investing, offering higher yields with lower volatility.
KMXK’s Lim highlighted a few considerations that investors must take into account when looking at private debt investments.
“Firstly, asset owners should consider if any guarantees are in place and the strength and reliability of these guarantees. This analysis helps the potential for default or loss,” he said.
Understanding how the general partner or the private debt fund actively monitors and manages investments within its portfolio is also key. This requires assessing the fund’s risk management processes, monitoring mechanisms, as well as their active engagement with borrowers.
“A proactive approach to monitoring can help mitigate risks and improve the likelihood of successful outcomes,” said Lim.
It’s also important to evaluate the safeguards put in place by the private debt fund to protect investor interests. “This may include collateralization, security interests, covenants, or other protective measures that provide additional security in case of default,” said Lim.
Finally, "the duration of both the private debt instrument and the fund itself should be taken into account, and whether the duration aligns with their investment objectives and risk tolerance [of the asset owner],” he said.
WRISE’s Teng also pointed out that the potential for uncorrelated returns is another big consideration for family offices looking to put money into private debt.
“By reducing overall portfolio volatility and enhancing long-term performance, SFOs are aiming to generate returns even in unfavorable market conditions,” he said.
PERFORMANCE MATTERS
It’s equally important to know how to assess the performance of private debt investments.
Typically, investors allocate a risk premium on top of benchmark rates, which accounts for the additional risk associated with illiquidity and the specific characteristics of private debt.
Lim said that while different investors have varying approaches, one commonly used benchmark for private debt is the Bloomberg US Corporate Index.
WRISE WM
This index represents the performance of investment-grade corporate bonds in the United States.
Given the potential to generate decent returns from public markets right now – given that interest rates have climbed in the past 12 months – and the global economic backdrop, investors are assessing the value of taking on illiquidity risk, said WRISE’s Teng.
“Investors’ appetite for infrastructure, technology, and venture debt investments remains strong”, he said.
“In Asia, there has been a surge in private debt funds seeking to cater to the demand primarily from startups, as they move away from raising equity capital at significantly reduced valuations, commonly referred to as ‘down rounds’ in the industry.”