This primer provides an in-depth look at different Private Equity (“PE”) strategies, including venture capital, growth equity, buyouts, turnaround strategies, PE fund of funds and secondary fund of funds.

Types of Strategies

1. Venture Capital (“VC")

Venture capital focuses on investing in early-stage companies with high growth potential. VC firms provide capital, strategic guidance and networking opportunities to early-stage companies in exchange for equity. There are different stages of venture capital financing across angel, seed, early stage, late stage and expansion, which are reflective of a company’s maturity level. As a company grows, additional financing is provided in the form of ‘financing rounds’ to facilitate further development.

An iconic VC success story is Google, which received US$25 million joint funding from Sequoia Capital and Kleiner Perkins in its early financing rounds in 1999, when Yahoo was still the dominant player in the fragmented search engine market. Sequoia Capital and Kleiner Perkins’ investments eventually led to exponential returns for both firms upon Google’s IPO in 2004, becoming one of the greatest VC investments of all time.

Key Characteristics 

• High Risk, High Reward: Early-stage companies present a significant risk due to their unproven models and competitive markets but offer the potential for outsized returns if they succeed
• Long-term Horizon: VC investments require a commitment to a longer holding period compared to buyouts, as startups often take time to develop their products, gain market share and become profitable
• Sector Specialisation: VC firms often concentrate on high-growth sectors such as technology, biotech, or green energy, which can experience rapid shifts and require deep industry knowledge

2. Growth Equity

Growth equity, which straddles between VC and buyouts, is a strategy where investors typically take a minority stake in relatively mature companies that are poised for expansion but are less established than typical buyout targets. Investors often adopt a passive role, preferring to keep the existing management in place to drive the company's growth. These firms are generally beyond the startup phase and are seeking capital to scale operations, enter new markets, or make significant acquisitions without altering the core structure or strategy of the business.

Airbnb, Spotify, and Uber are standout examples of companies that received crucial growth capital from TPG, a PE firm with a growth equity investment arm. At pivotal moments in their development, TPG’s investments enabled these firms to scale operations, expand into new markets, and refine their products and services. With this support, they evolved from promising startups into global leaders in their respective industries. TPG’s growth funds played a key role in driving the technological advancements and market expansions that powered the success of these iconic companies.

Key Characteristics 

• Less Risk than VC: Companies are more established, reducing the risk compared to VC investments
• Balance of Debt and Equity: Growth equity deals often use a balanced mix of debt and equity, with lower levels of leverage used compared to buyout transactions
• Moderate Return Expectations: Returns are typically lower than VC but higher than buyouts

3. Buyouts

Buyouts, particularly leveraged buyouts (“LBOs”), involve the acquisition of a company, typically with a significant portion of the purchase price financed through debt. LBOs make up a significant portion of the global PE AUM. The acquired company's assets often serve as collateral for the loans. The PE manager executing a buyout aims to drive the company’s growth, profitability, and improve its market position, followed by a resale or public offering.

The acquisition of Hilton Hotels by Blackstone in 2007 is a classic LBO deal – financing was done with $20.5 billion (78.4%) debt and $5.6 billion (21.6%) equity. Blackstone utilised its expertise to restructure Hilton’s operations and strategically divest non-core assets. They also appointed a new CEO with experience in the hospitality industry to steer the business through the Great Financial Crisis. By the time Blackstone took Hilton public in 2013 and subsequently sold off its remaining shares, the firm had generated $14 billion in profit, almost quadrupling its original equity investment.

Key Characteristics 

• Debt Leverage: LBOs typically involve high leverage, which can amplify returns but also increase financial risk if the company's cash flows fail to service the debt
• Target Mature Companies: Buyout targets are usually mature companies with established revenue streams and steady cash flows. These characteristics make it easier to service the debt incurred during the buyout process. The target companies often have significant assets that can be used as collateral for the debt and are seen as stable investments with potential for improvement
• Operational Improvements and Value Creation: Post-acquisition, the focus of a buyout strategy is often on improving the profitability and overall value of the acquired company

4. Turnaround Strategies

Turnaround strategies in PE involve investing in companies that are underperforming or struggling financially, with the goal of improving their operations and restoring profitability. PE firms with expertise in turnarounds will typically take an active role in restructuring the company's operations, management and strategy.

One of the turnaround stories involved Burger King, which was acquired by 3G Capital in 2010. Burger King was struggling with declining sales and an outdated image. 3G Capital restructured the company, revamped its menu and modernised its stores. The firm's efforts paid off when Burger King's profitability improved and it was able to go public again in 2012.

Key Characteristics 

• Focus on Underperforming or Distressed Companies: Turnaround strategies involve investing in companies that are struggling financially or operationally
• Operational Overhaul and Restructuring: The strategy often includes a significant restructuring of the company’s operations, management, and strategy to restore profitability
• Potential for High Returns: While risky, successful turnaround investments can yield high returns due to the relatively lower entry valuations of distressed companies

Types of Funds

1. Fund of Funds

PE fund of funds involve investing in a portfolio of PE funds rather than in individual companies. This approach allows investors to diversify their holdings across multiple PE strategies, geographic regions and industry sectors. Fund of funds managers select and combine PE funds to create a balanced investment portfolio of between 10 to 50 fund investments over several vintage years. Fund of funds are particularly suitable for allocators with smaller or less experienced investment teams who might not have the capability or resources to carry out the allocation process in-house. By entrusting a fund of funds manager to navigate the complexities of the PE landscape, these investors can benefit from a more hands-off investment approach while still gaining exposure to a variety of PE strategies and managers.

Key Characteristics 

• Diversification: By investing in multiple funds across various PE strategies, geographic regions and industry sectors, funds of funds spread the risk across different managers and strategies. This diversification potentially lowers the overall portfolio risk
• Access to Top Managers: Fund of funds can provide access to top-performing PE firms and niche strategies that might otherwise be inaccessible to individual investors due to high minimum investment requirements
• Simplified Diligence Process: Investors in fund of funds only need to conduct a diligence process around the fund of funds manager they invest with. This manager then takes responsibility for sourcing potential investments, carrying out due diligence, and monitoring the other managers holding the investors' capital

2. Secondary Fund of Funds

Secondary fund of funds focuses on purchasing existing interests in PE funds from other investors who are seeking early liquidity by exiting before the end of the fund’s life.

Key Characteristics 

• Accelerated Investment Pace: Unlike a primary fund of funds, which commits capital over time, secondary fund of funds provides immediate exposure to a portfolio of underlying PE fund investments
• Shorter Time to Liquidity: These funds typically have a shorter investment horizon as they invest in funds further along in their life cycle
• Discounted Prices: Secondary assets are often purchased at a discount to their net asset value

Wrapping Up

In summary, PE is not a one-size-fits-all asset class; it offers various paths for capital deployment and return generation. Building on this understanding of the diverse strategies within PE, it's important to delve deeper into the structural, economic, and relational aspects that underpin these investment approaches. 

In our next discussion, we will explore PE fund structures, the economic dynamics at play, and the key players involved.

The energy transition is set to reshape economies, businesses, asset prices and investment performance. In this feature piece, we unpack the current state of play and the climate policies driving investment opportunities at each stage of the energy value chain.

What Is Energy Transition?

Energy – it powers our homes, workplaces, vehicles and the production of almost everything we use. Much of the energy used today comes from burning fossil fuels like coal, oil and gas, and such generation processes make up a hefty 76%¹ of global greenhouse gas (“GHG”) emissions, which, as the science tells us, causes global warming that has far-ranging environmental and health effects.

The term “Energy Transition” refers to the global shift from fossil-based energy production and consumption to renewable energy sources such as solar, wind, hydro and geothermal power. From an investor viewpoint, there are opportunities to participate in this megatrend from both the demand and supply side of the energy system. The pathways towards achieving net-zero span across the entire energy value chain from the production, conversion, and delivery of energy to the use of energy, from infrastructure projects to existing and emerging technologies.

¹IEA (2023), Greenhouse Gas Emissions from Energy Data Explorer, IEA, Paris

Renewable Energy Generation

Halting global warming is only one driver behind the energy transition. Energy security and energy equity have come to the fore as global instability and rapid inflation threaten uninterrupted access to affordable energy.

The REPowerEU Plan is the European Commission’s proposal to end reliance on Russian fossil fuels before 2030 in response to the 2022 Russian invasion of Ukraine. At the outbreak of the invasion, almost half of EU gas imports were sourced from Russia and in the first two weeks after the invasion, gas prices were up by 180%². In conjunction with other measures taken, the REPowerEU plan is promoting substantial investment in renewable energy. With EUR$210 billion in new energy investments, the goal is to reach a 45% renewable energy mix by 2030³. This translates to at least 15% yearly increases in solar and wind electricity generation from 236 TWh for solar and 475 TWh for wind in 2023 to 621 TWh and 1,276 TWh respectively in 2030 (Exhibit 1).

²European Central Bank, The impact of the war in Ukraine on euro area energy markets
³European Commission, 18 May 2022, REPowerEU: A plan to rapidly reduce dependence on Russian fossil fuels and fast forward the green transition

Exhibit 1

Likewise, the U.S. Inflation Reduction Act (“IRA”), signed into law on 16 August 2022, and the Infrastructure Investment & Jobs Act (“IIJA”) enacted in November 2021, incentivise investment into domestic energy production, distribution and industries deemed important for U.S. national and economic security. Embedded within both legislative instruments are domestic production requirements that stipulate the need for end products and key components to be produced and assembled in the US. Together, the IRA and IIJA allocate more than US$169 billion for renewable energy technologies. The first 12 months into the IRA saw 270 new clean energy projects and  US$130 billion worth of investments unveiled⁴.

So while COP28⁵ saw over 100 countries agree to triple renewable energy capacity and double the global rate of energy efficiency by 2030, the policy stimulus to move towards renewable energy for reasons that include politics, economics and national security had been set in motion earlier. These policies send a powerful signal to investors and are driving significant tailwind for the transition away from fossil fuels.

Singapore, for example, is actively working with investors to fast-track renewable energy development in Southeast Asia (“SEA”), the fourth largest energy consumer in the world. Already home to over 100 clean energy companies, Singapore is attracting businesses to scale up in the region to meet SEA’s and its own net zero climate goals⁶. Innovative solutions include harnessing renewable energy sources in neighbouring countries, cross-border power grids, the largest Energy Storage System in SEA and other emerging low carbon alternatives such as hydrogen, geothermal and carbon capture.

⁴Reuters, 23 Nov 2023, Every country needs an Inflation Reduction Act
⁵COP28 stands for the 28th meeting of the Conference of Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC). COP is the main decision-making body of the UNFCCC
⁶EDB Singapore, An opportunity in Asia’s surging demand for renewable energy

The Electric Grid and Storage

At the rate renewable energy installations are taking place and with the electrification of cars, buildings and industry, neglected power grids risk becoming a bottleneck to the energy transition. Over and above catering to increased electricity use and variability of output, new transmission and distribution lines for solar and wind projects are needed to deliver power between deserts and seas to cities and industrial areas. The International Energy Agency has forecasted that 80 million kilometres of grids need to be built or refurbished by 2040 if country climate goals are to be met. That is equivalent to the entire existing global grid, translating into global investments of US$600 billion per year till 2030⁷.

The key difference between power systems based on fossil fuels and a system based on renewables is that energy output from solar and wind can be intermittent. That means a parallel solution is required to store the energy when the weather is favourable and to use it when it is not.

Grid-scale battery energy storage systems are best used for short-term peaks and troughs of intermittency. However, for storage capable of maintaining output for over four hours or longer, long duration energy storage (“LDES”) technologies are required, and these are currently at a lower state of technological readiness.

Again, this is where policy stimulus becomes a game changer for companies and technologies that need to get developed and deployed.

⁷International Energy Agency, Oct 2023, Electricity Grids and Secure Energy Transitions

Besides the power grids, a lot of other infrastructure is needed to make a transition to clean energy. Several countries have already announced national plans for new cars to be zero-emissions by 2035. To give consumers confidence in electric vehicles (“EVs”), investment must be made in EV charging infrastructure. The IIJA not only has billions going out to states to build that infrastructure, but to also upgrade public transit vehicles such as buses and trains.

Another regulatory development that has yet to be mentioned is the U.S. CHIPS and Science Act, which has authorised close to US$200 billion on building and research and development (“R&D”) capabilities. These include R&D technologies for advanced manufacturing, material science and energy efficiency. A good example is new ways of making steel and concrete without the huge amount of pollution it produces.

Retrofitting older buildings will remain a challenge for the U.S. and the EU. Any innovation that improves the energy efficiency for building construction, heating, cooling, lighting as well as all appliances and equipment installed in them will go a significant way in reducing energy consumption. Buildings account for as much as 40% of the EU’s energy use, with most being heated by fossil fuels⁸. In the wake of Russia’s invasion of Ukraine, Europe ramped up installation of high-efficiency electric heat pumps to help eliminate its dependence on natural gas. Today, more than a dozen European nations offer subsidies to purchase heat pumps. Tax credits and subsidies not only shape market demand, but they incentivise manufacturers and entrepreneurs. Technologies can now be developed to a point where the private sector is sufficiently de-risked to pick it up and run with it.

⁸Reuters, Mar 2024, EU Parliament approves law to make buildings more energy efficient

Conclusion

The energy system is changing at a pace not seen before. Declining costs of renewable energy technologies, coupled with favourable regulatory policies and increasing consumer demand for clean energy, have created a conducive environment for investment in this sector. Global investment in energy transition technologies hit US$1.8 trillion in 2023, up 17% from a year earlier. Investment in new renewable energy projects grew 8% to US$623 billion⁹.

Global private capital investment in the energy transition came to US$496 billion in the 12 months since the IRA came into effect¹⁰.

As investors warm up and plug-in (pun intended) to the fast-changing energy transition landscape, navigating the opportunity set for financial returns and making a real dent in carbon emissions will involve titrating between the dynamics of policy, technology and market demand.

⁹BloombergNEF, Jan 2024, Global Clean Energy Investment Jumps 17%, Hits $1.8 Trillion in 2023
¹⁰S&P Global Commodity Insights, Sep 2023, Financing the energy transition

Azalea hosted Azalea Investor Conference 2024 in July and we were honoured to have more than 200 guests, comprising institutional investors, family offices and our private banking and industry partners.

Broadening Access to Private Equity: Azalea’s Story

The conference started with an opening address by our Chief Executive Officer, Ms Margaret Lui. Margaret highlighted the successful journey of Azalea’s flagship Astrea and Altrium platforms in fulfilling our mandate to make private equity accessible to a broader group of investors. Margaret also set the stage by emphasising how private equity is an attractive asset class to navigate the volatile investment environment.

A Fireside Chat with Mr Dilhan Pillay Sandrasegara: Building Resilience in an Uncertain World

Our keynote speaker Mr Dilhan Pillay Sandrasegara, Executive Director and Chief Executive Officer of Temasek Holdings and Temasek International, delivered a highly anticipated fireside chat with Ms Margaret Lui. We thank Dilhan for sharing his wealth of experience and insights on how we can build resilience in an uncertain world.

Navigating Geopolitics and What It Means for Global Investors

Mr Pierce Scranton, Managing Director of Institutional Relations and Deputy Head of North America at Temasek International, spoke about geopolitical trends and how they affect the global investment landscape. His perspectives on US politics, especially in an election year, were especially helpful in contextualising the rest of our discussions around forces which shape interconnected global markets.

Demystifying Artificial Intelligence

Next, we dived into the transformative trends of Artificial Intelligence (AI) with Mr Raviraj Jain, Partner at Lightspeed Venture Partners — a multi-stage venture capital firm with extensive experience investing in AI. Raviraj covered important themes on investing in the AI and technology space, both in products and companies. Moderated by Mr Chue En Yaw, our Chief Investment Officer, the session helped to strip away the layers of ambiguity that often cloud our understanding of AI, and allowed us to visualise how AI will continue to transform the world we live in.

Finding Growth in the Current Landscape

Following which, we zoomed in on investment strategies of our PE fund managers, with a focus on growth investing. Ms Jacqueline Hawwa, Partner at TPG Growth which targets earlier-stage and high-growth companies, highlighted TPG’s investments across sectors based on market dynamics and their prudent approach to tech investing across market cycles. Mr Diwakar Chada, Managing Director of Investments at Azalea, moderated the Q&A segment where we discussed opportunities and challenges that Jacqueline foresees in the growth investing landscape.

Driving Capital to Sustainable Solutions

After which, we segued into two panel discussions. The first panel featured Mr En Lee, Managing Director and Head of Sustainable and Impact Investments in Asia at LGT, and Mr Eric Lim, Chief Sustainability Officer at the United Overseas Bank. Both panellists are instrumental in steering their firms’ pursuits to drive capital to sustainable solutions. In conversation with moderator, Ms Alisa Chhoa, Managing Director, General Counsel and Chief Compliance Officer at Azalea, the panellists provided valuable insights on industry trends and regulatory developments around sustainability and emphasised how an ecosystem approach is critical for achieving systemic change.

Optimising Your Allocation to Private Markets

Our next panel comprised Limited Partners at different stages of their journey in investing in private markets – Mr Alvin Goh, Chief Investment Officer at Finexis Asset Management, Ms Lim Li Ying, Deputy Chief Executive Officer and Chief Investment Officer at Singapore Labour Foundation, and Ms Winnie Hau, Investment Director from The University of Hong Kong. Moderated by Ms Tang Hsiao Ching, Managing Director of Investor Solutions and Marketing team at Azalea, the panellists shared their perspectives of asset allocation in private markets. Indeed, there is no one-size-fits-all solution and each investor should consider their unique risk/return profiles and resources when it comes to allocation to private markets.

Conclusion

We would like to extend our heartfelt appreciation to all speakers for taking the time to share their insights, and our guests for their participation. We are heartened by the support given to Azalea and it was indeed a privilege to have built valuable connections at the conference. We look forward to seeing you at the next event!