The rise of individual investors: collateralised fund obligations

Private Equity International examines CFOs in the first of a series on how retail investors can access private equity.

Collateralised fund obligations are a relatively new addition to the world of retail investors looking to access private equity.

The vehicles can offer exposure to private equity in the form of bonds that are backed by a portfolio of fund stakes. The portfolio generates cashflows for bond holders which are paid out in regular instalments.

Retail investors haven’t always been able to access private equity through CFOs. SVG Capital was an early adopter, completing the first of three securitisations for its Diamond programme in 2004. The offering was available in two share classes with a minimum investment of €250,000, according to the prospectus.

Singaporean state investment firm Temasek – among the largest to issue private equity-backed CFOs – has shaken up the status quo by making its latest offering available to the retail market. A Temasek subsidiary launched an investment prospectus in May for Astrea IV, a $501 million bond issuance of which a portion was given a minimum subscription amount of S$2,000 ($1,461; €1,266).

Demand was voracious. The S$121 million of Class A-1 bonds available to retail investors generated nearly S$890 million in valid applications – a 7.4 times oversubscription rate.

What is the appeal for retail investors?

The CFO is one way retail investors can access an asset class typically available to high-net-worth investors at the lowest end, or institutional investors at the largest end. Astrea IV’s underlying portfolio comprised $1.1 billion net asset value of funded commitments across 36 vehicles. Funds managed by Blackstone accounted for the largest proportion of the portfolio’s net asset value at 10.6 percent, while Silver Lake Partners and PAG Asia funds accounted for 8 percent and 6.9 percent, respectively.

The Astrea IV A-1 bonds offer fixed interest of 4.35 percent per annum every six months, with a 1 percent per annum interest rate step-up if the bond is not redeemed after five years. Investors may receive a bonus payment of 0.5 percent of principal at redemption if a performance condition is met.

While a 4.35 percent return may seem attractive, traditional PE returns are expected to be in the double-digits and are not capped at a certain level. Investors could be seen to be sacrificing potential upside in exchange for greater liquidity than a conventional fund commitment – something which can be paramount to retail investors who may not have the luxury of investing over the long term.

Still, for individual investors wanting access to private equity funds, investing in CFOs backed by a high-quality issuer can be a safer way to gain exposure to the asset class.

Stay tuned for more on how retail investors can access private equity this week.