Azalea Asset Management raises most of the capital for its fund-of-funds programme from Asia, where the brand name of parent entity Temasek Holdings resonates with investors in Singapore, Hong Kong, and Taiwan. However, the firm reached deeper into the region’s institutional LP base for its recently closed growth capital offering, securing commitments from Japan and South Korea as well.

“We are slowly penetrating the market, and we can be patient. The journey in Japan started with the Astrea programme and us talking to them about bonds backed by cash flows from private equity funds. We built relationships, and they’ve developed from there,” said En Yaw Chue, Azalea’s CIO, adding that the number of Asian family offices participating in the fund also increased.

Part of Azalea’s remit is to make private equity accessible to a broader range of investors. The firm assumed responsibility for Astrea – Temasek’s initiative to give third-party investors exposure to its portfolio – in 2016 and pioneered the issuance of PE-backed bonds to retail investors.

Altrium, the fund-of-funds business, closed its debut vehicle on USD 650m in 2019. A successor closed on USD 805m three years later. On each occasion, Azalea made a balance sheet contribution amounting to one-third of the corpus. The rest was split between smaller institutional investors, accredited individual investors, and private banks representing the high-net-worth segment.

Product evolution

Altrium Growth Fund I – which also features Middle East investors for the first time as part of a largely institutional LP base – closed on USD 212m. Azalea simultaneously raised Altrium Co-Invest Fund I, securing USD 268m in commitments from a more even spread of institutions, accredited investors, and private banks. Each fund exceeded its USD 200m target after about 12 months in the market.

Azalea began offering fund-of-funds in response to investor demand for equity products – as opposed to the Astrea debt offering – when interest rates were low. A fund-of-funds with primary and secondary exposure addressed common pain points. For example, many target investors were looking to get into private equity for the first time, so they prioritised diversification and j-curve mitigation. The new strategies represent continued evolution.

“When we designed the Altrium core fund-of-funds programme, we wanted to help investors build retirement programmes for themselves – deploying steadily over time, not picking vintages. We might get a 12%-15% net return, but there’s a cap on the upside, so we introduced other strategies,” said Chue.

“Investors can allocate a portion of what they have to these products. Historical data has shown that when you add co-investments to your portfolio, you can increase your return without greatly increasing your risk.”

The flagship Altrium fund-of-funds focuses on US and European buyout strategies, with a dash of growth equity. To begin with, this mostly meant global brand-name managers, but the firm has since expanded into the middle market and lower middle market.

Altrium Growth Fund I brings exposure to VC managers that have never been part of the flagship offering. The selling point is that LPs would struggle to replicate this portfolio on their own because it takes a long time and many of the managers are capacity-constrained and not seeking new investors.

Co-investment represents another first foray. While the Azalea team has experience in the area, it resisted adding co-investment to the fund-of-funds. “We wanted a programme that let you sleep at night,” said Chue. “We didn’t want to include co-investments that potentially might skew returns either on the up or the downside.”

The Temasek effect

Both funds are intended to capitalise on being part of the Temasek ecosystem. The co-investment programme was inspired by a recognition that Temasek was passing on plenty of opportunities presented to it because they fell below the minimum cheque size threshold. Azalea pitched to mine this deal stream and began by making commitments from its balance sheet.

“We didn’t have a track record, but we could demonstrate the kind of deals we wanted to do. When we started showcasing the logos and people saw the list of co-investments – we looked at more than 150 to date and only invested in 12 – they knew it was a good portfolio,” Chue explained.

“We attracted investors based on our differentiated sourcing. One private bank client observed that it was in almost exactly the same funds as us, but it wasn’t getting shown any of the co-investments we had.”

The Temasek connection also serves as a differentiator in that it allows Azalea to make substantial contributions to its own funds and start investing irrespective of progress on external fundraising. First closes on the new funds came in December of last year, but deployment began before that, essentially removing some of the blind pool risk for new investors.

“For each programme, we have a defined sponsor commitment, so we can put that to work before we raise capital. We finance the warehousing and any capital calls, so investors come in at cost – there are no catch-ups – and get an immediate mark-up in value,” said Chue. “We held the final closing for the new funds shortly after the first close due to robust demand.”