Whatever the case may be, it is time to look for alternative income strategies to add to this part of the investment portfolios.

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1 Wealthy families build their wealth as entrepreneurs. However, when it comes to preserving their wealth, they somehow fail to tap into these entrepreneurial skills and often invest primarily in equities and fixed income through conventional wealth managers. The Crossinvest investment philosophy is to manage investment portfolios using the timeless principles of asset allocation, diversification, attribution and risk management methodologies, to ensure there is a diversified portfolio of assets within a portfolio (and not only equities and fixed income). We strongly feel entrepreneurial families should have a certain percentage of their wealth (depending upon age, risk profile and investment objectives) invested and managed not only in traditional assets but also in unlisted private markets, through well-diversified portfolios with the medium to long term in mind. While our traditional asset investment portfolios are offered through Crossinvest Core Access, opportunities to invest in the private market space, like private unlisted equity, venture capital, infrastructure, impact investing, internet of things, clean energy, are offered through Crossinvest Private Access. In thought leadership papers during 2017, we focused on why investing in private equity investments was essential for discerning investors. In this piece, we cover why this should be extended to Private Credit as an asset class. Investing for Income The 30-year bond bull market may be ending. Inflation might be back and interest rates might be going up! But then again, none of this may happen and we may yet continue on our merry way. The one certain thing though is that we are in for an interesting year that may result in low returns and higher volatility for safe harbour investments. Whatever the case may be, it is time to look for alternative income strategies to add to this part of the investment portfolios. Crossinvest Private Access is pleased to introduce one such strategy: Access to a global market of US$67 trillion with potential cash returns of 8-12% p.a. Crossinvest Private Debt. Many investors, irrespective of wealth or risk profile, have a part of their portfolio focussed on capital stability and cash income, largely invested in government and corporate bonds. But the 30 year bond bull market may be coming to an end. The last charge of this extraordinary bull run was led by central bankers QE campaigns, but these have now peaked and may retreat in the near future. Bond returns may be both low and more volatile than usual, an unattractive combination. This is even more concerning for those investors in leveraged bond portfolios, which is a commonly used strategy particularly in Asia. Bankers have been overly eager to facilitate more leverage to achieve higher returns or to maintain double digit returns as the fallacy goes, the higher the leverage, the higher the returns. In this paper we introduce the private assets investment class, which is focussed on debt markets much like bonds, but without some of the unattractive market dynamics that bond markets might face in the decade ahead. It is not clear how the performance of a leveraged strategy would be impacted in a bond bear market, but is fair to say that it is not going to be pretty. relations@crossinvest.com.sg BEST INDEPENDENT WEALTH MANAGER ASIA (Wealth Briefing Asia) BEST DISCRETIONARY & ADVISORY OFFERING 2017 (Private Banker International) DISCLAIMER: The securities and/or financial instruments recommendations and comments presented should not be considered as an offer or solicitation to buy or sell securities and/or financial instruments. These investments are subject to market risks and there is no assurance or guarantee that the objectives of the recommendations will be achieved. Crossinvest (Asia) Pte Ltd relies on a variety of data providers for economic and financial market information. The data used in this report are judged to be reliable, but Crossinvest disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses.

2 Investment Strategy: Why Crossinvest Private Access is now including Private Debt Crossinvest prides itself in focussing on investment fundamentals. We avoid conflicts of interest in product selection through charging our clients on a simple fee for service basis. This frees us up to look at investments with a clear, untainted lens, without the distraction of needing to sell house products or to seek leverage for the sake of leverage. This clarity of view comes through in every part of our business, from the performance of our equities portfolios to being a market leading independent private wealth manager able to offer our clients access to private deals via Private Access. Now we are introducing Private Debt to our Private Access service. The reason for this, once again, is about investment fundamentals. Here are the top three reasons why Private Debt makes sense in the portfolio of most family offices and wealthy investors today: 1. Bond returns will be impacted, one way or another Income from government and corporate bonds is at record lows. Traditional fixed income funds, investing largely in government bonds, are expected to return between 2.5% and 3.5% p.a. for the next decade. Corporate bonds, depending upon where you invest in terms of risk, is likely to be 3.5% to 6% p.a. These low returns might be acceptable in the context that equity returns are also expected to be low. But the volatility of fixed income is also likely to increase. The reasons for higher volatility are explained in the adjacent box but in short, we are entering an extended period of inflation uncertainty. At least for government bonds, the prospect of 2-3% returns with higher volatility changes the relative investor appeal of the various parts of the cash and fixed income asset class. Non-institutional investors in government bonds will be better off reallocating some of the government bond capital into cash (similar returns, lower volatility) or corporate debt (higher returns, not much higher volatility). And where corporate debt comprises listed markets (more susceptible to volatility) and unlisted markets, the relative appeal of unlisted markets is likely to increase. Goodbye Bond Bulls, Hello Bond Volatility Perhaps the worst enemy of bond markets is inflation uncertainty. Bond prices are largely determined by expectations of future interest rates. If markets expect inflation to rise, they will expect central banks to increase interest rates faster, and bond prices will fall. Similarly, if markets expect inflation to ease, bond prices will rise. The current global market environment is leading many market practitioners to different views on inflation expectations and this is increasing uncertainty and volatility in bondmarkets. Inflation views 1. Inflation will stay low because of the digital economy s impact on competition and logistics costs, and because of the high levels of government and household indebtedness increasing the tightening effect of rate increases. 2. Inflation cannot stay low with such low interest rates, GDP growth, expected wages growth, and building trade protectionism. Here the argument is that low unemployment and low interest rates will ultimately lead to higher inflation. In the new interest rate environment in which rates might be rising gradually from record lows and inflation uncertainty is rising, investors may get little value from government bonds and may face more volatility from corporate bonds. In any case, one thing is for certain, investors will need to diversify their fixed income allocations.

3 2. Regulatory changes mean banks must exit lending markets, creating parallel opportunities There is a secular change upon us. The banks in some countries, on the back of regulatory changes and their own internal cost pressures, are essentially withdrawing from certain activities as they look to shrink their balance sheets. This shift has led to the establishment of a parallel private lending industry that investors with sophisticated decision-making and modest liquidity constraints, can exploit by: 1. Engaging in activities that banks are no longer able to; 2. Helping banks as they shrink their balance sheets, and 3. Taking advantage of risk premiums that can be more attractive now that banks have withdrawn from certain activities. Before the financial crisis of , savings found their way into the real economy through three types of intermediaries: banks, shadow banks, and asset managers. Banks and pre-crisis shadow banks both borrowed short-term funds to capitalize often highly-leveraged long-term lending. Banks short-term funds are typically highly-liquid customer deposits. Shadow banks short-term funds were generally raised in wholesale money markets and also from retail investors via Wealth Management Products and Debentures. During the financial crisis, money markets went on strike and flows remained depressed. Broader apprehension at the potential risk taken by banks against deposits guaranteed by the public purse, led to sweeping reform of the rules governing their operations. In particular, the new rules increase and strengthen the capital banks are required to allocate against assets, and limit their proprietary trading activities. See the Box below for more information. The result is an incentive either to strengthen capital or rein in the size or risks of balance sheet assets. Both of these lead to the secular change of less business lending and higher interest rates to borrowers. Investors can take advantage of the need for banks to hold more capital as regulations tighten. Institutional investors have been increasing their investments in these loan assets every year since Not only are returns around the same level expected from equity markets, but observable volatility is much lower due to the absence of a highly traded market. Furthermore, banking regulators and governments have been encouraging investor involvement, resulting in the supply of investible assets growing rapidly and therefore premium returns being sustainable.

4 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Dec-17 Annual Return (Total) 3. Private Debt offers superior risk-adjusted returns Private Debt is a US$67 trillion asset class globally. It comprises loans from banks and other private sector lenders to companies of various sizes (excluding banks). While private debt can include property-backed lending, the analysis we have used within this paper excludes these assets. It can also include lending to small business and consumers, but again we have excluded these, asthe return characteristics of such loans are likely to be different. A core Private Debt investment typically has these features: Loan of US$2-50m per borrower; Borrowers are mid-sized to large corporates, with valuations of anything from $20m to $100bn; Loan terms are 18 months 3 years; Interest can range from as low as 5% p.a. to as high as 15% p.a. depending upon the credit risk of the company. (Please note that the target assets for Crossinvest will be in the 8-12% p.a. net return range); Interest is typically payable monthly, providing a cash coupon as a result; There is often the potential for capital gains via a conversion right or other once-off payments; Over the past 15 years, private debt investing has produced an average return of around 11.2% p.a., with a range of 9.5% p.a. to 17.6% p.a. This is in line with, if not in excess of, equity market returns, but with far less volatility. Returns for Private Debt have also been favourable on a risk-adjusted basis, or even outright by a slight margin, than the strongly performing high yield corporate bond market, as shown below. Direct Lending Yield HY Bonds Yield 30% 25% 20% 15% 10% 5% 0% -5% -10%

5 Challenges and risks Like any asset class, Private Debt has its unique risks. The key primary risk being risk of default, i.e. that the borrower does not repay the loan. In this case there is typically a recovery process in which the manager of the loan investment negotiates with the company or their receivers to recover as much of the loan balance as possible. Understanding this recovery process is therefore critical, not just so one can recoup as much of the invested capital in the event of default, but also to ensure that the loans have been structured the right way in the first place to ensure the maximum possible chance of capital recovery. While the percentage of loans that default is typically small, successful recovery could still add 1-2% p.a. in returns. This greatest challenge of this asset class however is that it is difficult to source and manage these assets, and there are not too many experienced managers around due to the relatively new nature of the asset class. Loans still need to be originated. Loan administration is very staff and infrastructure intensive compared with trading in securities such as CLOs, CDOs or bonds there is therefore a need for experienced fund managers/originators. Experience in sourcing a steady source of new loans, negotiating the best terms for those loans, and managing any credit issues that arise, are essential components for success. Private debt is by its very nature illiquid. Agreements are privately negotiated and terms are not made public. Therefore investors cannot expect to find frequent mark-to-market pricing of the contracts. This illiquidity factor does explain why higher returns must be paid by borrowers. The lack of easy-to-access prices means that reported volatility is lower than some more public markets. Other risks associated with Private Debt markets to be aware of include: Sector-specific credit funds pose more cyclical risks then broad based diversified funds e.g. property-backed debt funds Private Debt is not Peer-to-Peer lending There are a number of new aggregators offering P 2 P lending investment opportunities in the SME space. These could be aslittle as$10,000 to $500,000. This sector has its own merits, but the return and risk profile is different to Private Debt. Some of the lenders in this sector are charging the equivalent of 20-30% p.a. or more the returns reflect the risks it is important to understand that this is not the same asset class as Private Debt. Inexperienced fund managers Bond fund managers or private equity managers sometimes diversify their own business and set up Private Debt funds. The skills required to manage a bond portfolio (where terms are standardised and the key risks are typically market volatility and the shape of the yield curve), are vastly different to Private Debt. Similarly, Private Equity managers manage for the upside on an investment, whereas Private Debt managers will manage the downside risks.

6 Current Leverage (Corporate Lending % of GDP) How to invest and what we like So that brings us to how we like to invest in Private Debt. In short, we are looking for the right combination of: 1. Manager experience The experience of the manager outweighs most other factors, such as fees, within reason. The Crossinvest Private Access team has identified select managers with direct lending experience, rather than experience in trading on public bond markets. One of the key filters we have used is that we have ensured that the managers we appoint have a strong network of originators to be able to select high quality loans, and importantly, that they have experience in managing defaulted loans. 2. Specific investment terms We, at Crossinvest Private Access, continue to search for global boutique managers in this space. Because Private Debt as an underlying asset class remains relatively new (despite the global market size), we believe there are opportunities to seed new management terms, i.e. be one of their first investors, in return for a share of the equity in the fund manager itself or at least in return for much lower management fees. Investing in boutique fund managers is a well proven strategy in general, but particularly opportunistic in Private Debt at present. 3. Location: a) Strength of banking regulator While we aren t investing with the banks, the stronger the banking regulator, the stronger the opportunity for investors to move in where banks are forced out. b) Size of market Markets that are too niche create concentration risk which simply isn t necessary when there are opportunities to invest in the world s largest economies without compromising on returns. c) Leverage of the market Some of the larger global economies are currently experiencing corporate sector leverage well above normal levels. We would avoid such markets China 140 France 120 Japan South Korea Canada Singapore New Zealand Australia US UK 60 Malaysia Germany Italy 40 India Indonesia 20-20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% Growth in Leverage past 10 years

7 Conclusion One of our core philosophies at Crossinvest Private Access, is to provide our clients access to institutional quality investment opportunities that are not readily available on listed markets or via a bank s platform. Because these are more difficult to access, banks typically only reserve such investments for their top customers. More than fifty percent (50%) of the world s largest institutional investors have an investment allocation to private debt in one form or another and yet few, if any, individuals and families do. We believe now is the time to consider private debt within investment portfolios given its strong returns relative to its risks. In particular, we believe that this asset class should form part of the diversification strategy away from the traditional fixed income allocations given the potential headwinds ahead within the sector. We are currently bringing new boutique private debt investment on to the Private Access platform. Speak to your Crossinvest relationship manager about how best to invest, or if you are not yet a Crossinvest client, we are happy to talk to you about how to join us and get access to such opportunities going forward. relations@crossinvest.com.sg