Singapore Hedge Fund

Alternative asset management in Singapore

big potential in Asia debt: Hedge Fund to cash in…

NEW YORK (Reuters) – As hard-hit Western banks and hedge funds scramble to sell their Asian loans and bonds, one newcomer expects to pick up these choice assets at rarely seen discounts.

Opvs Group is launching two Asia-focused credit funds designed to benefit from the region’s underlying growth potential by acquiring debt at prices depressed by the global financial crisis.

That’s a classic opportunity, said Barry Dick, who left Merrill Lynch last year as its Asia head of debt products distribution and co-founded Opvs.

“Asia has been sold off in line with the rest of the world. It really looks like a case of the baby thrown out with the bathwater,” Dick said in an interview.

Dick founded the Singapore-based firm with three other Asia veterans: Chris Francis, who ran Asian credit and later equities research at Merrill; Sandeep Gill, former global credit derivatives head at DBS Group Holdings Ltd; and Tommy Kim, co-founder of Singapore-based HFG Investments Pte.

This team spent the past year building a 25-person firm that will be dedicated to the region and, for now, one asset class.

“There are a lot of boutique operations in the region — five guys in a garage and a prime broker — but we wanted to build a large asset management company, the best in Asia, with very specialized investment teams.”

Opvs is rolling out two funds in the coming month.

First will be the Opus Asia Opportunity Fund, which will snap up loans from closely held, high-growth companies in a region reaching from China, Japan and Southeast Asia to India and Australia.

It has been seeded with $50 million and will complete its first round of fund-raising on Tuesday, but will continue adding money through the fall.

The fund will hold these credits until maturity, with proceeds paid out as distributions after one year and then every six months until all the loans mature.

Later next month Opvs will launch Fundamental Asia Credit Fund with $50 million initially and growing to a maximum $300 million. The fund will invest in highly liquid and publicly traded bonds and short bonds through the swaps market.

In a sign of the times, both funds will provide shareholders with Internet access to their portfolio holdings.

In contrast to just a year or two ago, when Asia was a top priority for every Western bank and fund manager, the fast growing region has become a lot less crowded. These same investors have been forced to shed portfolio holdings and often turn first to their Asian assets.

The potential returns on these investments are high, Opvs says, because loans extended by big banks like Merrill, Goldman Sachs and Morgan Stanley during the boom years of 2005 through 2007 are now being sold off at fire-sale prices.

In recent months, emerging markets funds have become a hot item in the hedge fund community. Still, for the relative few prepared to step in today, what was a sellers’ market quickly has became bargain city.

“There’s been a big shakeout since the credit crunch,” Francis said. “That’s left us in a situation where there is an excess of sellers of credit, or people holding credit, but not a lot of people who have balance sheets to take up that capacity.”

Jean Viry-Babel
senior partner
VBK partners

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Temasek Holdings Investment Performance and Transparency

On 8 June, I wrote in the Straits Times, a newspaper in Singapore that Temasek Holdings should not shy away from risk despite recent losses. Here is the article:

“Temasek’s track record has come under fire of late for a couple of false steps, notably its investments in Merrill and Barclays. These false steps are unfortunate, but so too is a general criticism of Temasek.

Temasek should not shy away from taking risk, particularly now. The last 30 years have seen steady growth in economies and wealth. The democratization of risk through the rise of derivatives, the growth of capital employed in active management across markets, in arbitrage and relative value as well as traditional investing, the widening and deepening of markets, have all contributed to a gradual reduction in continuous risk. Unfortunately this has also stored up gap risk. In the period of calm preceding 2008, however, the risk reward characteristics of investment in general were deteriorating as more capital chased fewer opportunities manifesting in higher correlation between seemingly unrelated investments, the need for more leverage to eke out decreasing levels of return, lower volatility across almost all markets. Risk levels became higher as risk perception became lower. Risk is highest in calm waters. Once the iceberg is sighted and collided with, risk is apparent and is converted from risk to damage.

The Fall of 2008 was such an iceberg. Markets are no longer as risky; they are damaged. For arbitrage and relative value investments, there is no better environment than damaged markets. Investors will be well compensated for policing of spreads, for bringing efficiency and price discovery back to markets. Equities may be cheap or expensive, but given the systemic de-risking of 2008, there are clearly relative value opportunities. Mergers and acquisitions have been more active than expected as companies seek strategic acquisitions, fire sales, consolidations. Bond markets have seen a recovery in issuance and take up has been healthy. Equity recapitalizations have been strong in emerging markets. All these are signs of a global economy healing itself.

The timing of the disposals of Barclays and BoA may have been unfortunate, but in the new world order, financial institutions are likely to be regulated as utilities with lower returns on equity.

The financial crisis represents a step change in the world order where the profligacy of the developed world is exposed and paid for over a period of decades, while the value creation and maturity of emerging markets raise productivity, economic growth and standards of living. Emerging markets are the source of demand and the source of supply of natural resources, whereas service economies in the developed world appear to be sidelined in the value chain. Perhaps there is some method behind Temasek’s new choice of CIO after all.”

The response to the article, from what I guess was mostly be a Singaporean audience, was mostly negative. Most Singaporeans are suspicious of Temasek’s track record and apparent lack of transparency. In many ways, Temasek’s main problem is a public relations one rather than a material one. While I neither defend nor criticize Temasek, I thought I would take a closer look at the objections to address my own questions about the organization.

While Temasek is known for its apparent lack of transparency regarding financial results and the precise details of its investments, the Temasek website provides some information. It provides quite a lot of information actually. But first, Temasek is 100% owned by the Ministry of Finance and is required to report only to its shareholders. One can of course argue that such responsibility should pass through to the citizens of Singapore as well, but that is another discussion.

In 2005,however , Temasek issued Yankee bonds which are a USD public bond issue regulated under the US Securities Act of 1933. Under the Act, these bonds are subject to certain standards and conditions including creditworthiness and reporting standards. Temasek received a AAA rating from Standard and Poor’s and Moody’s in December 2008. Temasek’s group financials are now available on their website dating back to 2004 in some detail.

I cannot comment about the management quality of Temasek. The website provides some investment performance information indicating a circa 18% annualized return on equity since inception. In the absence of volatility or other risk measures, it is difficult to comment on the quality of those returns.

The period of poor performance which is most in the public eye is 2008 where Temasek reported that for the period March to November 2008, the value of its portfolio declined by some 31% from 185 billion SGD to 127 billion SGD. This is a large loss, but the MSCI World equity index fell some 38% in the same period.

Using a rough and ready calculation, Temasek’s NAV increased by roughly 54% from Mar 2004 to Nov 2008. The absence of precisely comparable data means that I am using book value for the March 2004 valuation and market value for the November 2008 valuation. This is conservative I believe given the economic cycle. In contrast, in the same period, the HFRI Hedge Fund Index gained 15%, emerging market bonds (EMBI) gained 15%, global bonds (the old Lehman Agg) gained 19% and the MSCI World Equity Index made a total return of -4.22% with dividends reinvested. Note that the Temasek portfolio is slightly levered at between 0.9 to 1.4 X equity.

It is not a bad performance for an effectively long only private equity, strategic investment mandate.

From Bryan Goh

Jean Viry-Babel
senior partner
VBK partners

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