Direct investments: taking a targeted approach to wealth
When investing, an ‘off-the-rack’ product may not suit everyone’s needs, especially in today’s volatile economic climate.
Direct investments have become a key component of alternative investing, especially among the ultra-high net worth (UHNW) investors who are looking for a more targeted and opportunistic approach to their portfolio allocation. Such investments typically occupy the higher-risk, higher-return corner of a portfolio to balance out more bedrock, conservative elements. As returns from those bedrock portfolio assets have dwindled in a low-yield and low-interest-rate environment, demand for alternative investments is growing.Today, businesses are choosing to stay private for longer instead of going the route of issuing an initial public offering (IPO) for capital. This implies the bulk of valuation growth happens prior to listing. Therefore, investing in a successful company when it is private becomes critical to achieving stellar returns. This is why direct investments into private companies attract so much interest from family offices and UHNW investors.
Private market opportunities have historically been aimed at institutional investors rather than private banking clients, because of factors such as larger investment sizes, the sophisticated level of due diligence required, and challenges around asset valuation. Increasingly, though, UHNW investors and family offices are pursuing direct investment strategies, too. A 2020 report by FINTRX found that 60% of family offices1 in Asia are investing directly – and within private-equity portfolios, more than half of investments are direct.
Through the UHNW Bespoke Investments offering at Bank of Singapore, clients can gain access to direct investments over the entire growth cycle of a company, from early stage, to growth, to pre-IPO and, finally, a guaranteed allocation tranche at IPO.
“Direct investments appeal to many UHNW clients because they are less opaque and offer more control than investing through a private equity or venture capital fund,” said Carolyn Tham, Head UHNW Bespoke Investments at Bank of Singapore. “Family offices are able to invest longer-term than many equity funds, and they are prepared to wait for the right investments that align with their interests and goals.”
According to a Bain & Co. study,2 investors who hold direct investments and compound returns over a period of 24 years will effectively earn double the returns of a typical buyout fund that operates with much shorter horizons.
Work with a trusted institution
As with all forms of alternative investments, particular attention must be paid to risk-management, as higher returns usually equate to higher risk. Various other factors make managing the risks even more challenging.
For instance, private investments are more prone not just to macro risks, but also to specific risks relating to a target company’s operating model, execution risk and regulatory exposure. Evaluating these factors is more difficult because the information available for a meaningful analysis is insufficient, compared with a public investment. Arriving at a fair valuation for a company in these circumstances requires a level of transparency that’s simply not available to many private investors.
This leaves investors with a choice: perform the complex analysis process themselves across a multitude of possible deal options in multiple sectors, or partner with a trusted institution that already has a strong track record of successful private investments.
“At Bank of Singapore, our partners not only perform full due diligence prior to investing, they also have ‘skin in the game’ and interests aligned with ours,” said Tham. “It’s important for investors to work with an institution that can source exclusive deals.”
Unique opportunities through reputable partners
An investor who is uncomfortable with the illiquidity often associated with private market opportunities might be steered towards a growth-to-late-stage direct investment opportunity with potential liquidity within two to five years.
Whether they be closed-end funds, direct investment into deals from boutique managers, M&A referrals or emerging opportunities in the digital economy, Bank of Singapore’s UHNW Bespoke Investments team maintains a strict philosophy of partnering with best-in-class managers and co-investing with reputable General Partners (GP).
“We focus mainly on investments into companies in our region, which tend to be disruptors in their markets, and cater to a substantial addressable market,” says Tham. “For example, in the tech space we are big on e-commerce, fintech and online education because in the post-Covid-19 world, we have observed that these areas are direct beneficiaries of the ‘new norm’ and will continue to be so. With the growing adoption of the digital economy, companies in these sectors tend to have an accelerating path to profitability.”
Some recent examples of deals in which Bank of Singapore has co-invested with GPs include Grab and Tokopedia. Grab has announced it will go public via the world’s largest SPAC merger with Altimeter Growth Corp at a US$39.6 billion post-money valuations. Tokopedia, meanwhile, announced a successful merger with Gojek to form Goto, the largest technology group in Indonesia.
“Bank of Singapore provides access for our most exclusive clients to a pipeline of unicorns that have been sourced with due diligence by leading GPs. We work closely with our clients to tailor the type of investments that resonate with their portfolio goals. At the end of the day, clients have to understand what they are investing in and know that we are here to ensure that full information and disclosure is provided before any investments are made,” said Tham.
1 FINTRX; 2 Bain & CoGeneral and cross-border marketing disclaimers
