PETALING JAYA: In the current financial environment, investors in public equity are beset with high valuations and slower growth in tandem with weak global economic growth forecasts. Given the challenges in seeking returns in the stock market, many are turning to private equity to seek fulfil their investment mandate.
In the not-so-distant past, the private equity market was not an investment sphere that was accessible for the everyday investors. It was fraught with issues of ineffectiveness, opacity and accessibility.
With the increasing pace of digitalisation, however, technology has caught up with the previously arcane world of private equity.
In a recent interview with SunBiz recently, Sng Khai Lin, co-founder and CFO of Singapore-based private investment platform Fundnel, acknowledged that, previously, access was only restricted to a few with less information flows to the public to gain access or even to be educated in this asset class.
“Prior to digitalisation, if the public were to invest in private investment, it was limited to friends and family of a particular business,” she explained.
Leveraging on the advancement of information technology, Fundnel has improved the accessibility of private investment platform, offering private equities in various stages from series A rounds to pre-initial public offering stage from companies across the globe to investors.
Sng elaborated that since the private investment platform came into the market, it has been able to increase accessibility by fractionalising the ticket size.
She gave the example of investing in a late-stage company such as Grab or SpaceX, which was not accessible to most investors unless the investors know the founder or a contact in the company’s investor relations.
“Even then the ticket size would be multi-million dollars before an investor could gain exposure to private companies. Today, it is possible to invest in such companies with a S$50,000 (RM150,000) ticket size investment.”
On the flip side, she said, private companies looking for capital could take advantage of private investment platforms as it facilitates price discovery, as well as being faster and more efficient than if the companies were to raise capital by themselves.
Sng disclosed that the time taken for Fundnel to complete the offering for its clients varies from a month to four months.
Since its inception, the company has processed over 3,500 applications, but only 25% have survived the initial stage, which is screened by a proprietary machine learning algorithm. Again, out of the 25%, only 5% have made it through to launch on the platform.
Besides the increased number of corporate investors coming into private equity, Sng observed that there has also been more allocation by external asset managers for better returns for their assets under management.
“In the decade prior to 2005, to get 7% return, you probably would need to invest 5% into alternatives. In a 10-year horizon post-2005, to get the same return you would need to invest 10% from an asset allocation perspective.”
Sng’s observations are in line with the research findings by Cambridge Associates, an American investment which examined data from institutional investors spanning two decades.
Based on the data from 132 endowments and foundations between 1998 and 2018, it found that investors with an average allocation of 15% or more to private investments over two decades reported a median annualised return of 8.1%, compared with a return of 6.5% for those who had allocations of less than 5%.
When asked about concerns over the profitability of tech startups, Sng opined that “it boils down to what people view as the value of a company, as many tech companies are still operating despite not turning into profit.
“Real examples prove that the traditional lens are wrong, looking at the growth of Facebook and Google, the build up may take longer but when they turn it on, it is a captive market.”
Citing as Whatsapp as an example, Sng said the sale of the company was not measured by revenue but by the number of users.
“Despite not having revenue, it was still valuable. The investors’ perspective of what is the value and how it is defined need to be updated.”
source https://www.thesundaily.my/business/digitalisation-driving-higher-private-equity-returns-IA1299497
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