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Investors Need Bigger Toolkit Amid Private Markets Shift - Reyl Group

Tom Burroughes, Group Editor , 20 December 2018

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The portfolio management head at Reyl Singapore, part of the private banking group, says his firm needs to offer clients more ways to tap into a shift in how companies are owned and financed.

Wealth managers will need to build capacity to invest in private markets as companies seek alternatives to listing, a senior figure says.

There is a trend of firms taking longer to go for initial public offerings, and for de-listing, buying back shares and otherwise moving towards a more private form of ownership. These steps are happening for a variety of reasons, such as avoiding some of the heightened scrutiny that comes with being on a listed market. As recently argued by the CFA Institute, this shift can challenge investors if ways of tapping into this different marketplace are harder to find. On the other hand, investors have been drawn to sectors such as private equity because of the premiums that the higher illiquidity brings.

Daryl Liew, head of portfolio management at REYL Singapore, part of Switzerland’s Reyl Group, says his firm needs to develop into this private markets space.

“The nature of the stock market has changed,” he told this publication in a recent interview. With technology firms becoming more important in the economy, the capital-intensive needs of older types of industries, such as energy and construction, means that the demand to tap into public investors for capital may be limited in some countries and markets, Liew said.

“We need to develop more capabilities,” he said, referring to widening the investment toolkit for clients.

However, IPOs and demands for share floats are still brisk in some sectors, as in biotech, Liew continued.

Unlisted firms are not required to disclose as much timely information to investors as listed businesses. The lower reporting burden is a reason why many firms go off the stock market. But in this era of shareholder activism and focus on corporate governance, this shift can cause problems. It is, at least at first blush, more difficult for private investors to put pressure on a privately-held firm than a listed one because a private firm does not publish so much material and they tend to be less widely analysed. Academic research (January 2017) from figures at Universidad de Chile, Florida International University and Arizona State University concluded that firms were more likely to de-list if confronted with having to comply with IFRS reporting requirements. New EU regulations such as MiFID II, affecting how firms pay for company research, may also add to this problem.

As previously mentioned, the CFA Institute has flagged this trend as an investment headache: in a new report, it says that firms stay private for longer and raise more capital privately than in the past. The study estimates that the median time before an initial public offering for US companies has risen from 3.1 years in 1996 to 7.7 years in 2016.

Direct routes
In parallel with a need to build more capabilities in wealth management around private market investing, Liew also talked about the trend among HNW investors, banks and family offices to go into direct investing and co-investing. And with family offices, their asset focus has broadened out. In Singapore, for example – where more family offices are being set up – investment is not purely a real-estate play any more.

“In the past family offices were not just into property but now are starting to diversify more,” Liew said.

Liew also reiterated the importance to Reyl Group’s business model of corporate advisory work, given that so many HNW clients today continue to have operating business requirements as well as liquid wealth. Reyl Group can also provide a network so that clients can do business with and interact with other clients.

Emerging recovery?
The past 12 months have not been kind to emerging markets, given the headwinds of a rising dollar and US interest rates (much emerging market countries’ borrowing was in dollars). The MSCI Emerging Markets Index is down by more than 15 per cent since the start of the year. 

Liew is quite upbeat about potential for emerging markets next year, however, and is positive on emerging markets bonds, such as Indonesian debt, judging by the quality of recent government debt issuance. “There are pockets of value in several bond markets,” he said.

As for Europe, “We’ve been disappointed with economic growth in Europe this year. It is hard to divorce what’s going on politically from the economic story," he said.

With the US-China standoff over trade, there will be some winners from any outsourcing/offshoring of business from China to less costly places in Asia (Thailand, Vietnam), he continued.

Globally, Reyl Group is neutral on equities. The firm has gone from being underweight emerging markets to neutral.

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