"The exit uplift is usually 20% to 25% for some of these managers, which is quite inherent in all the general partners we have in our portfolio. This also explains why our Astrea portfolios' LTV is always around 40% at launch, but this drops over time because of all these uplifts in valuation, coupled with all the distributions coming back," says Chue En Yaw, CEO and CIO of Azalea Asset Management.
Azalea's secret sauce is how it chooses its managers for the Astrea funds. "These are managers who have navigated through different cycles. They have a very long-term track record and very consistent performance," Chue points out.
Azalea's products span a range of risk-return profiles (see chart), with buyout funds, ESG funds, co-investment funds, and growth and venture capital (VC).
"These (Astrea) are primarily buyout funds, in which managers have control over the underlying companies and can react very quickly, as we observed during Covid-19. They had been able to refinance shorter-term debt with longer maturities, recapitalise their companies and pivot their businesses to emerge stronger. These are the operational skill sets that the managers have to run the companies and they have proven that they can do so through the different cycles," Chue explains.
He says the Astrea portfolios are stress-tested based on negative scenarios, including financial crises.
"Our Astrea portfolios are underpinned by high-quality managers with a long-term track record,and we have also modelled downside scenarios, such as an extended global financial crisis. The results show that we can redeem the bonds on time. The LTV for our Astrea bonds is conservative, so we don't foresee any potential issue, given that the equity stake is pretty high," Chue adds.
The positive experience of retail investors with the Astrea bond programme has ensured that subsequent tranches are oversubscribed. For instance, the public tranche of the Astrea 8 bonds issued in July 2024 was three times subscribed and the largest IPO for the year. During an investor day, Azalea's management team articulated that they plan to issue an Astrea bond once every 12-18 months.
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Singapore's book-building process involves institutional investors who price the transaction. Similarly, institutional investors will go through a proper book-building process for the Astrea bonds to decide what kind of interest rate is suitable for that risk level. The entities that participate in this book-building exercise include insurance and endowment funds, asset managers, hedge funds, and private wealth channels.
"For each of the different tranches in our bond programme, we make sure that we allocate enough bonds to allow institutional investors to participate. We always want to involve institutional investors who understand the risk, who look at these investments day in and day out, and who can better appreciate what pricing levels should be. We then use the same interest rate set during the placement tranche for the retail IPO. That's how each Astrea bond transaction is priced," Chue describes.
In their latest distribution reports, Astrea 7's LTV was 34.6% and Astrea 8's LTV was 40%. The LTVs fall over time as the cash flow comes in. "If you have a very well-constructed portfolio with high-quality managers, it will be cash flow generative. This helps meet interest payments, and the fair value gain will reduce the LTV over time," Chue says.
