Azalea

At Astrea Investor Day 2025, Margaret Lui, Azalea’s Chief Executive Officer and Chue En Yaw, Chief Investment Officer had an insightful conversation on Astrea private equity (“PE”) bonds.

Azalea’s Beginnings and the History of Astrea

They kicked off the conversation with a recap on Azalea’s beginnings and the history of Astrea. Azalea was set up in 2015 by Temasek with the mission of making private equity more accessible to a wider group of investors. Astrea PE bonds marked the first step of a phased approach towards making PE available to retail investors. It provided retail investors with an opportunity to invest in an investment-grade rated fixed income product which is backed by cashflows from PE funds.

Building upon that foundation, Azalea launched Altrium PE Fund in 2019. Since then, Azalea has developed a suite of equity products including Altrium PE Fund,  Altrium Co-Invest Fund, Altrium Sustainability Fund and Altrium Growth Fund to meet different risk and return preferences of accredited investors.

Personal Asset Allocation & Fixed Income Investing

When discussing asset allocation for one’s investment portfolio, Margaret highlighted the importance of investing in a diversified portfolio of safer assets such as fixed income, together with higher returning and higher risk growth assets like equities. She also shared that the right balance would depend on each individual’s financial goals and risk tolerance.

Key Features of Astrea PE Bonds

En Yaw continued by outlining some key features of Astrea PE Bonds:

1. Lower risk profile compared to equities; 
2. Regular coupons paid every six months with a fixed maturity; and
3. Rated by a reputable international agency to provide additional comfort to retail investors.

Margaret and En Yaw also took the opportunity to address some common questions that investors have on Astrea bonds.

1. Pricing of Astrea PE Bond

On how Azalea determines the interest rate for each Astrea PE bond, Margaret provided insights into the bookbuilding process, explaining how institutional investors play a key role in determining the bond pricing before it is offered to retail investors.

2. US Dollar Tranche for Retail Investors

En Yaw highlighted how investors have been able to subscribe to a USD-denominated tranche since Astrea 7, which provides more investment options for retail investors since many have become more accustomed to having USD exposure.

En Yaw also stressed that foreign exchange risk is a factor that retail investors should consider when investing in the USD tranche, as investments may be subject to exchange rate fluctuations if their investment currency base is not in USD.

3. Allocation Policy

Margaret explained the Astrea bond allocation process, sharing that Azalea's goal has always been to allocate to as many investors as possible.

Given the strong demand for Astrea bonds, Margaret highlighted that the allocation process ensures that smaller investors will get some allocation for the bonds even if it is not to the full amount they applied for. At higher amounts, applicants would have to be balloted and were allotted only a portion of their applications. Interested parties may refer to the balloting table published at the end of every issuance for more details.

Leadership Succession and Azalea’s Future

En Yaw will succeed Margaret as CEO on 1 April 2025, while retaining his CIO responsibilities. 

On sharing his vision for Azalea, En Yaw highlighted that in addition to being a regular issuer of Astrea PE bonds, the team will look for new ways to innovate to expand retail offerings and enhance investor access to PE. 

Watch the full replay of the fireside chat here:

On 18 February 2025, Azalea hosted our annual Astrea Investor Day 2025, a forum for Astrea Private Equity (“PE”) bond investors to understand more about PE and the performance of the Astrea PE bonds.

Azalea Overview

The webinar kicked off with a firm overview by Tricia Tan, Director, Investor Solutions & Marketing, who highlighted Azalea’s three-pronged role as Investor, Developer and Manager. Established by Temasek in 2015, Azalea has approximately US$11 billion in assets under management to date, and the Astrea platform has completed eight transactions and the Altrium platform has expanded to five PE funds. 

Reflecting on the past year, Tricia shared several key milestones for both Astrea and Altrium platforms. Azalea issued Astrea 8 in July 2024 and successfully redeemed Astrea V PE bonds in December 2024. September 2024 also marked the final closings of Altrium Co-Invest Fund I and Altrium Growth Fund I for a combined US$480 million, both surpassing their respective target fund sizes of US$200 million each.

In January 2025, Azalea also marked a decade of broadening access to PE for a wider group of investors, and celebrated our 10^th Anniversary with an appreciation dinner attended by investors, industry partners and staff.

Market Update

Justin Keh, Managing Director, Investments, highlighted several key market updates. He shared that global gross domestic product (“GDP”) growth remained stable in 2024, with continued economic growth expected in 2025 and 2026. He also spoke that U.S. and Eurozone interest rates were expected to diverge.

Justin also discussed Trump’s first weeks in office. Markets and economies continue to assess the implications of the new Administration’s executive orders and policy direction, while the PE industry evaluates their potential impact on business operations and growth strategies. He observed that despite challenges and uncertainty in the markets, PE as an asset class continued to be resilient across market cycles.

Astrea Performance Updates

Justin also shared updates on the performances of the various Astrea PE bonds which have held up amid challenging macroeconomic conditions.

• Since issuance, the Astrea V PE bonds enjoyed strong cash distributions of over US$1.5 billion since 2019, representing around 120% of the initial portfolio Net Asset Value (“NAV”). Underpinned by this strong generation of cash flows, the Astrea V bonds were fully redeemed in December 2024.
• The Astrea VI portfolio also enjoyed strong cash distributions totaling over US$1.1 billion and experienced fair value gains of US$432 million. Its Loan-to-Value (“LTV”) ratio also sits comfortably at 20.4%, well below the 50% maximum LTV ratio.
• Astrea 7 portfolio has reaped strong cash distributions of nearly US$800 million, around 41% of the starting portfolio NAV. It has also recovered from a slight decline, seeing fair value gains of US$57 million.
• Issued in July 2024, Astrea 8 portfolio has generated healthy cash distributions of over US$200 million, around 14% of the starting portfolio NAV. All the bonds continue to be rated investment grade.

Justin highlighted the credit strength of the Astrea PE bond series which saw multiple credit rating upgrades over the years. He also shared that the Astrea portfolios continued to be cash generative, which helped to de-risk Astrea transactions progressively over time. 

Life Cycle of Astrea PE Bonds

Lim Jun Jie, Director, Investor Solutions and Marketing, provided an in-depth illustration of the Astrea PE bonds life cycle using Astrea V as an example: the issuance of bonds, payment of interest, reserving mechanism for repayment of bond principal and the redemption of bonds. 

He began with an overview of PE funds and how they are used to construct Astrea portfolios. He also explained how cashflows from PE funds are used to pay bond obligations through a pre-determined order of payments, also referred to as the Priority of Payments. He continued by sharing how as reserves are accumulated, the bonds are progressively de-risked. The LTV ratio of the structure also reduces over time. Finally, at the Scheduled Call Dates, if there are sufficient cash set aside to redeem the bonds and there are no outstanding Credit Facility loans, the bonds will be fully redeemed. 

Key Takeaways

Jun Jie closed off the presentation by highlighting several takeaways from the Astrea Investor Day 2025. 

1. PE as an asset class has demonstrated resilient performance across market cycles
2. Geopolitical and macroeconomic implications from Trump 2.0 remain to be seen
3. The reserves for the various Astrea bonds continued to stay on track. All Astreas continue to fulfil their bond obligations
4. The underlying portfolios of Astrea bonds are constructed to be cash flow generative and diversified, while structural safeguards are in place to mitigate downside risks

In Conversation with Margaret and En Yaw

Margaret Lui, Azalea’s Chief Executive Officer and Chue En Yaw, Chief Investment Officer shared their insights on the Astrea bonds series. They explored topics from Astrea bond allocation to pricing, as well as the importance for investors to build portfolios that align with their own needs and risk appetites. Margaret and En Yaw also highlighted the relative relevance of bonds in all investors’ portfolios including young investors. Read the summary of the fireside chat here. 

Watch the full replay of the webinar here: 

Disclaimer: Please note that all information shared in this session is intended for your information only and is not an offer, invitation, or recommendation to purchase, hold or sell any securities. If you would like to receive any investment advice or recommendation, please do speak with a qualified financial advisor.   

Private Equity (“PE”) firms invest in companies, aiming to generate returns for their investors by proactively making improvements and growing the companies before selling them at a higher value. This article, part of our Private Equity Primer Series, explores the PE investment lifecycle, highlighting the key stages and strategies for successful investments. 
 

1. Forming the fund and fundraising

The initial phase of PE lifecycle involves the formation and fundraising of the fund. During the formation phase, the fund manager develops a strategic investment focus, establishes fund terms and prepares key offering materials like the Private Placement Memorandum (“PPM”) and Limited Partner Agreement (“LPA”). Following the formation, the fund enters the fundraising phase, where the manager approaches potential investors to secure capital commitments. The initial closing marks the start of the fund's investment activities, but fundraising often continues to meet the overall fundraising target. 

2. Identifying Potential Investment Opportunities

To generate returns for investors, fund managers will begin by scouting for investment opportunities that align with their strategy. They utilize a mix of methods including market research, professional networks, investment bankers, and direct outreach to potential targets. Advanced data analytics and AI tools are increasingly used to identify trends and promising sectors. Here are some of the traits that PE firms look for when identifying targets: 

• Historically Profitable with Cash Generation Potential

  Fund managers favour companies with a history of profitability and cash flow generation, even if they're currently underperforming. A strong financial past suggests potential for future success. 

• Low Failure Risk with Strong Asset Base

  Considering the leverage involved in PE deals, fund managers prefer companies with low failure risks and a substantial tangible asset base. These assets act as collateral for loans and ensure steady cash flow for debt repayment.

• Opportunities for Productivity Enhancement

  Fund managers often target companies with room for significant performance enhancements. Fund managers use their resources to drive productivity improvements through various levers such as operational enhancements, technology upgrades, and market expansion.

   

3. Performing Due Diligence and Acquisition

Once a fund manager identifies a potential target company, a comprehensive due diligence process is undertaken. This multifaceted approach involves examining various aspects of the target company to ensure a well-informed investment decision. Some of the factors considered are:

• Financial Performance, e.g. EBITDA and net profit margins, etc.
• Market Position and Competitive Landscape, e.g. market share, growth potential, etc. 
• Legal Review, e.g. compliance, intellectual property concerns, etc. 
• Operational Assessment, e.g. production efficiency, supply chain, management effectiveness, and cost structures, etc. 
• ESG Evaluation, e.g. carbon footprint, adherence to reporting requirements, etc. 

Based on the due diligence findings, the fund manager moves on to the acquisition process that involves finalising the acquisition structure, negotiating the final terms of the deal, including the purchase price, financing structure, securing necessary financing from banks or other financial institutions, and finally closing the deal. 

4. Adding Value and Managing Portfolio Companies

Post-acquisition, fund managers engage actively in the management of their portfolio companies. They might implement strategic changes, improve operational efficiencies, or streamline management practices. The goal is to increase profitability and growth prospects. Fund managers often leverage their network and expertise to provide strategic guidance, access to new markets, and additional capital for growth initiatives.

Case Study Snapshot:

One notable example of how a PE firm employ a mix of value creation strategies is the acquisition of a US-based discount retailer, Dollar General, by Kohlberg Kravis Roberts (KKR):

Dollar General Corporation is a discount retailer. The Company offers merchandise, including consumable items, seasonal items, home products and apparel. Its merchandise includes brands from manufacturers, as well as its own private brand selections with prices at discounts to brands¹.

1.    Management Changes: KKR brought in a new CEO, Rick Dreiling², who previously ran drugstore chain Duane Reade Inc. He and his new management team was instrumental in boosting sales and implementing operational improvements. The leadership change ensured effective execution of new strategies.
2.    Operational and Product Optimisation: The new team and KKR streamlined Dollar General’s operations by improving supply chain management and reducing operational costs. Concurrently, they optimised their product mix, focusing on high-margin products like private-label goods, and streamlined their assortment by eliminating lower-performing items³.
3.     Growth and Expansion: Dollar General's market expansion involved the addition of new stores and the remodelling of existing ones⁴, at a time when market conditions were favourable due to falling lease rates.
4.    Debt Restructuring and Cost Management: Despite a substantial debt load, KKR effectively managed Dollar General’s financial leverage, improving its Debt-to-EBITA ratio⁵. Additionally, they significantly reduced shrinkage, which includes losses due to factors like shoplifting and mispricing, thereby saving considerable costs and contributing to the overall financial health of the company.

This article delves into the structure and economics of Private Equity (PE) Funds, a key segment in the global investment landscape. We explore the framework, roles of key stakeholders, fee structures and trends in PE funds.
 

Basic Framework of PE Funds

A typical PE fund operates over a 10 to 12-year lifecycle, encompassing the fundraising, investment, management and exit phases. At its core, Limited Partners (LPs) commit capital, which General Partners (GPs) deploy into investments. Profits are generated through asset management and divestment, with returns distributed to LPs while GPs receive their carried interest if PE funds meet the returns hurdle. This structure is designed to align the interests of GPs and LPs while maximising investment returns.
 

In-Depth Look at General Partners (GPs) and Limited Partners (LPs)

GPs are responsible for the day-to-day management of the fund. They identify investment opportunities, conduct due diligence, and make investment decisions. GPs also play a crucial role in managing, adding value to portfolio companies and exiting the investments. Their compensation is typically a combination of management fees and carried interest, aligning their financial interests with the fund's performance.

LPs, on the other hand, provide the capital required for investments. They are typically institutional investors, such as private banks, insurance companies, family offices or high-net-worth individuals. LPs have limited liability, restricted to their capital commitment. They rely on GPs to manage the investments effectively and have limited involvement in the day-to-day operations of the fund.

The relationship between GPs and LPs is governed by a legally binding contract that establishes the terms and conditions of the applicable fund (such as a limited partnership agreement). Those terms and conditions would include the fund’s investment strategy, the rights and obligations of the LPs, how and when profits will be distributed amongst the partners, fees and expenses payable, and governance-related provisions, amongst others. 

Fund Economics: Fee Structures and Returns

The economics of PE funds are anchored in their fee structures. They charge a management fee and performance fee, also known as carried interest. 

Management fees are typically charged on a quarterly basis and calculated as a percentage of committed capital or assets under management (AUM) that is commonly around 2% per annum. 

Carried interest represents a share of the profits earned by the fund, accruing to the GPs as a performance incentive. Typically, GPs receive 20% of the profits, but only after returning the initial capital contributed by the LPs and achieving a predetermined rate of return, known as the hurdle rate. This structure ensures that GPs are motivated to maximize returns for the investors.

Fee structures can vary based on the type of fund. For instance, evergreen funds or co-investment funds might have different fee arrangements, reflecting their unique investment strategies and risk profiles.
 

Types of PE Fund Structures

Private Equity (PE) funds can adopt various structures to meet specific investment strategies, regulatory requirements and investor preferences. Here are some of the common types of PE fund structures: 
 

1.    Limited Partnership 

Common in private equity, where limited partners, or investors, provide capital and have limited liability, and a general partner manages the fund. This structure is favoured for aligning interests between investors and managers and for the limited liability protection it offers to investors. 
 

2.    Fund of Funds (FoF)

These funds invest in a portfolio of other funds rather than investing directly in stocks, bonds or other securities. This allows investors to achieve diversification across different managers and strategies.
 

3.    Co-Investment Fund 

In a co-investment fund, investors are provided direct equity exposure at the portfolio company level typically with no fees and carry charged by the underlying GPs. 
 

4.    Evergreen Funds

These funds do not have a fixed lifespan and operate on a perpetual basis. Capital can be raised, and investments can be made indefinitely. Investors often have the ability to enter or exit the fund at predetermined intervals, providing more flexibility compared to traditional closed-end structures.
 

Wrapping Up

The interplay between GPs and LPs, shaped by structured economic incentives and legal agreements, underscores the essence of PE funds. Diverse in structure, from Limited Partnerships to models like Evergreen and Co-Investment Funds, they address a wide range of investment strategies and investor needs. In the next article of the series, we dive deeper into the lifecycle of a PE fund.