Worlds first securitisation backed by private equity cashflows

Mark Law

Mark Law, Managing Director, Alternative Assets - Asia-Pacific & Mauritius

27 August 2018

The launch of the US$510m-equivalent Astrea IV collateralised fund obligation in June marked the first time that a securitisation backed by private equity cashflows was made available to retail investors. Indeed, the manager – Azalea Investment Management – was motivated to bring the transaction in part by a desire to contribute to the development of private equity fund investment products in Singapore.

Astrea IV is backed by interests in a diversified pool of 36 private equity funds, with approximately US$1.1bn net asset value of funded commitments and US$168m of unfunded capital commitments. The class A1 notes were listed on SGX.

Mark Law, Managing Director, alternative assets for the Asia-Pacific and Mauritius region at SANNE, notes: “These two elements taken separately are no great shakes, but combining them and offering retail investors access to the pool is an interesting proposition.”

He confirms that the main driver behind Astrea IV being offered publicly is that Azalea – which is a unit of Singapore government investment arm Temasek – is focused on introducing new investment products to make private equity accessible to a wider investor base. Other motivations were the desire to drive innovation and returns, as well as provide another funding source and maintain the Astrea securitisation programme. 

Additional requirements in order to offer the deal publicly included more extensive due diligence and increased transparency around each party’s role. The prospectus was also tailored to make it more accessible to retail investors. 

Law notes that the assets themselves are unusual: while normal securitisation pools comprise assets that pay on a regular basis, Astrea IV’s consists of global top-performing funds, whose pay-out and distribution schedules are less uniform than regular receivables. “The portfolio was constructed to have more seasoned funds, which would provide more distribution cashflows. Generally with private equity funds, distributions occur in the later stages of the investment,” he explains.

The funds in the portfolio are managed by 27 general partners and comprise 596 underlying investments across 24 different industry sectors. The largest holding accounts for circa 2.6% of NAV, while the software and services sector accounts for the largest industry exposure, at 17.4% of the portfolio.

Funds with a buyout strategy make up 86% of the portfolio, funds with a growth equity strategy account for 12% and the remaining exposure is in a private debt fund. US-based funds account for 63% of the NAV, while the remaining exposure is split between Asia and Europe. The three largest private equity sponsor exposures – Blackstone, Silver Lake Partners and PAG Asia - represent 10.8%, 8% and 6.6% of the portfolio respectively.

Approximately 52% of Astrea IV’s NAV falls in the top two performance quartiles, according to Preqin data. The funds have a weighted average vintage of 2011 and a weighted average investee company investment holding period of circa 4.3 years.

The underlying funds will distribute cash as they exit investments and will make capital calls when they require additional cash to invest. Cashflows generated by the funds will be used to pay off the bonds, as well as interest and other expenses.  

Rated by Fitch and S&P, the deal comprises S$242m A/A rated class A1 notes, US$210m A/NR class A2s, US$110m BBB/NR class Bs and an US$597.4m unrated equity tranche. Additionally, there is a US$100m liquidity facility and a capital call facility sized at the amount of unfunded commitments of the underlying funds. 

The senior bonds have a scheduled call date of five years, while the legal maturity of all the notes is 10 years from the closing date. S&P notes that while private equity cashflows are less predictable than those of fixed income instruments, they have historically followed a J-curve that may extend up to 10 years. 

The issuer is an SPE that is sole shareholder of two asset-owning companies (AOCs), which used the note proceeds to repay a portion of existing loans from the sponsor incurred in connection with the acquisition of the fund investments. The AOCs will hold the fund investments as limited partners for each of the underlying interests.

The AsterFour Assets I AOC holds 22 fund investments and AsterFour Assets II holds 14 fund investments. The structure of the AOCs and allocations of specific private equity funds to each are for tax reporting purposes, according to Fitch.

The sponsor - Astrea Capital, which is owned by Azalea - is expected to retain the entire equity stake (approximately 54% of NAV) in Astrea IV. The transaction is the fourth in a series launched by the sponsor in 2006, 2014 and 2016 (SCI 7 June 2016).

A number of key structural changes have been made between Astrea III and Astrea IV, however, including the fact that Astrea IV’s fixed maximum LTV ratio is 50%. Astrea III featured a step-down maximum LTV ratio, which started at 45% and declined throughout the life of the transaction, thereby requiring more NAV to support the rated bonds in the transaction’s later years compared to Astrea IV. 

Additionally, Astrea IV features a disposal option, which provides an additional source of cash to pay obligations. The manager has the ability to sell stakes in the underlying private equity fund interests at its discretion, providing the aggregate NAV of underlying funds sold prior to the redemption of all bonds is not greater than 10% of the aggregate initial NAV. 

Astrea IV also features larger rated debt tranches than Astrea III, accounting for 46% of its NAV versus 39% for Astrea III. These changes make Astrea IV somewhat less resilient to extreme stress than Astrea III, according to Fitch. 

Law says that there was strong appetite for the Astrea IV notes and the deal was oversubscribed. “It took a while to prepare a retail offering and, subject to positive feedback, there is no reason why Azalea wouldn’t issue another public deal,” he suggests.

SANNE has two roles on the deal: transaction administrator (to calculate waterfalls and ensure debt covenants are met and so on) and fund administrator (to ensure that valuations are received on time and as expected, and aggregate the NAV of the overall asset pool). “We have a private equity division that generally undertakes administration for private equity funds and a debt unit for securitisations,” Law explains. “It’s rare to be able to incorporate both functions and there are few firms that have the ability to do both; even fewer of them are public companies like SANNE. Moreover, SANNE is also agile: we don’t have the regulatory burden of a large bank, for example, and so we can provide a tailored service.”

The financial and structuring advisor on the deal was Greenhill Cogent, while Azalea Asset Management was the arranger.

Law notes that securitisation activity appears to be on the rise in the Asia Pacific region, largely evolving out of credit fund investments in loans, but also due to a shift more generally into debt. “Banks pulling out of credit and financing activities means we’re beginning to see a gap for securitisation to start taking hold. An obvious candidate is the Chinese ABS market taking off, but an increase in non-performing loan opportunities is also interesting.”

He continues: “The latter is being fuelled by regulatory changes. For example, Indian bankruptcy laws are making it easier for assets to be disposed of. And in Singapore, a relaxation of some regulations is allowing alternative sources of financing to emerge.”

However, Asian CDOs appear to be particularly in demand at present – given the recent closing of the Bayfront Infrastructure Capital transaction (SCI 18 July) – and further deals are expected to follow.

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