Market turmoil over the past 12 months may have made asset allocation tougher for asset owners, but family offices - with a nimbler, pick-and-choose approach - are showing their strategic advantage over larger asset owners.
Opportunities are emerging in the private debt space where rising inflation and a following sea of rising interest rates are challenging actors meaning that there are, therefore, deals to be made.
Vincent Au, managing director and chief investment officer at multi-family office ALPS Advisory, says private debt is becoming more interesting in the current environment. While other private market assets on the equity side are facing mark-to-market issues, and concerns about the ideal holding period, private debt is also offering solutions.
“With the high-cash coupon-paying instruments, you will get the money back relatively quickly. Private debt is also quite tactical in terms of its defensive nature. With everything going on with inflation and interest rates, private debt has a floating rate and also meets those criteria. It seems like a very good security to have,” Au said at a panel discussion at AsianInvestor’s Family Office Briefing in Hong Kong on March 28.
At family office Peterson Group, a family-owned company with an emphasis on the real estate sector, private debt has also gained favour. However, the attraction is very selective.
“We look at private debt, more specifically we look at secured credit, not structured credit. We have a slight bias towards real assets credit, but we also look at other types of secured credit,” Elsy Li, chief operating officer at Peterson Group, said.
She said that in private debt, Peterson Group is more likely to go direct or co-invest with much larger funds, or offshore with real estate developers the company has partnered with before.
And opportunities are increasingly presenting themselves.
“The real estate sector in North America has started to show actual opportunities on the debt side. Not fire sales, but there are liquidity drains and distressed opportunities that are presented to us directly,” Li said.
Lincoln Yeh, managing director of private equity at family-controlled Sun Hung Kai & Co, agrees that private equity is becoming more attractive, adding that the asset type can complement a general portfolio in the current market environment.
“We see an opportunity for mid- to high-teen yields. If you structure it correctly and have warrants, you can have an equity kicker and equity-like returns. It makes sense for near-term, distribution-type reasons and safety,” Yeh said.
Since interest rates have started going up after inflation gained further pace following the influence of the war in Ukraine, the holding duration expectations of private market assets has changed slightly
At Peterson Group, the holding period is typically 5 to 7 years. While the company looks for returns overall, it also looks for reduced volatility, especially given recent ups and downs, Li explained.
“We want a sustainable portfolio that will last through decades. That also impacts our return profile, we want to see stability, cashflow and recurring dividends. That actually shortened our investment holding period a bit. And balancing the steadier business is already providing a certain level of stable return,” she said.
Sun Hung Kai’s Yeh has also seen a clear need to reassess holding periods of private assets. He said the firm is constantly making assessments, especially because it is not purely focused on private equity but also public markets.
“We always assess against which opportunities that give us the best risk/reward profile today. And especially over the past 6 to 12 months, liquidity has become key,” Yeh said.
While Sun Hung Kai is committed to its private equity efforts over the longer term, it also must keep an eye on developments in public equities, he said.
“Horizons have shortened a little, and we have taken a view of what is not core to private equity and what sort of liquidity we can generate from the private equity portfolio to redeploy into more liquid ... opportunities."