Azalea Investment Management has launched its fifth private equity (PE) bond for retail investors, Astrea 8 Class A-1 and Class A-2 bonds. The public offer will open from 9am on July 11 and close on July 17 at noon. The bonds will be issued on July 19.
Azalea, a wholly-owned subsidiary of Sevoira, which in turn is wholly owned by Temasek Holdings, is offering $260 million of Class A-1 bonds at a fixed interest rate of 4.35% yearly and US$50 million of Class A-2 bonds at a fixed interest rate of 6.35% yearly.
Chue En Yaw, Azalea’s chief investment officer, says the interest rates were set by institutional investors in a very competitive book-building process and are the same for retail, institutional and accredited investors. He was speaking at a media briefing on July 10.
This public offer follows the placement of $260 million Class A-1 bonds and US$150 million ($202.4 million) Class A-2 bonds to institutional and accredited investors, which concluded on July 10.
Margaret Liu, CEO of Azalea, explained that the firm’s mandate is to bring private equity to the public market. “And [the] Astrea bond is really one of the conduits and ways to fulfil that mandate,” says Liu.
Azalea launched its first retail PE bond in 2016, which saw a 131% return on the initial NAV when redeemed, or a 31% return on notional principal. Its second PE bond was redeemed at 108% and its third at 114%. The Astrea VI and Astrea 7 PE bonds, launched in 2021 and 2022 respectively, are 75% and 41% reserved. Azalea has about US$9 billion of assets under management.
For the Astrea 8 bonds, the Class A-1 bonds have a minimum subscription amount of $2,000, while the Class A-2 bonds have a minimum subscription amount of US$2,000. According to Azalea, subscribers to the Class A-2 bonds will pay in Singapore dollars at the fixed US dollar exchange rate of US$1 to $1.35.
Both bond classes have a final maturity of 15 years, with a mandatory call at the end of five years for Class A-1, and six years for Class A-2. Astrea 8, will be required to redeem Class A-1 bonds on July 19, 2029, and Class A-2 bonds on July 19, 2030, if sufficient cash is set aside to redeem the bonds and other conditions are satisfied.
If the Class A-1 and Class A-2 bonds are not redeemed on their respective scheduled call dates, there will be a one-time 1.0% yearly step-up in the respective rates.
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Astrea 8 is backed by cash flows from a portfolio of 38 PE funds managed by 27 reputable general partners, according to Azalea.
Cash flows from selling the investee companies are used to pay the interest coupons and for the redemption of the PE bonds.
As of Dec 31, 2023, these funds invest in 1,028 companies across various regions, vintages and sectors. The total portfolio net asset value (NAV) for these funds is US$1.47 billion, with a fund strategy of 76.4% buyout and 23.6% growth equity. The funds are mostly based in the US (63%), followed by Europe (20%) and Asia (17%). The vintage years range from 2015 to 2020.
When asked about the methodology in which Azalea seeks out PE funds, CIO Chue says that the firm is looking to construct a portfolio that is diversified across managers.
“You won’t see a manager that is more than 10%, you won’t see a single fund that is more than 8%, most of the funds you’ll see are already in fund 10, 11, 12 …” he says.
What Azalea also looks out for is a consistency of cash flows that are coming back in the next five to six years. The equity performance of a fund is not a very important criteria for bondholders.
Chue says a fund must generate enough cash flow to achieve the NAV required for Azalea to meet its bond repayment obligations.
