We’re pleased to introduce BridgeWood’s inaugural investor letter which will serve as a periodic update related to opportunities and notable observations that we come across in our dialogues with investors, managers, and others in our network.
BridgeWood connects progressive investors with established and emerging managers across public and private markets. We largely specialize in Asia related opportunities and believe a confluence of factors unique to the region provide fertile ground for alpha generation. We also embrace an objective unconstrained approach to sourcing unique and compelling opportunities across geographies, asset classes, and investment strategies. Market inefficiency, innovation, dislocation, and specialization are perennial themes.
We’re pleased to share that 2021 was a strong year for our managers with most materially outperforming their respective market proxies. This serves as a powerful reminder that dynamic active management can provide very different outcomes for investors.
Some groups prefer a high degree of discretion, and we don’t work with all managers on an exclusive basis. For these reasons, the managers in this letter are discussed anonymously. The first few sections focus on public markets with the latter on privates.
Asia/Emerging Market L/S Credit:
Our Asia/emerging market long short credit manager had a strong 2021 with a net return of +9.73%. The funds long and short book were both profit centers with shorts being the largest driver of positive returns. Since inception, the fund has achieved an annualized net return of at +16.93% with positive performance each calendar year. February 2022 marks the funds 3-year anniversary. The fund has generally exhibited low to negative correlation with major credit indices and equity markets. This strategy reminds us that credit investing is nuanced. Interestingly, we’re seeing some investors “not currently investing in credit” consider this strategy based on its unique approach, risk, return, low/negative correlation, and diversification benefits.
The manager uses an active trading approach designed to capitalize on potential inefficiencies in EM credit. Historically, the Fund has employed modest gross exposure, sizable positive and negative net exposures and has been managed to a tight ex- ante/ex-post volatility profile . With 36 months of operations, the largest peak-to-trough drawdown is only -3.2%. Returns are mostly generated through spread widening and tightening in single name bonds, as opposed to leveraged carry. This strategy has been continuously refined by the Sr. PM who has ~20 years of dedicated EM credit investing experience.
The fund and strategy continue to benefit from positive net inflows. In January 2022, the manager was awarded two major mandates from a large U.S. Public Retirement System and a large global asset manager. The firm is now a registered investment advisor with the U.S. Securities and Exchange Commission and licensed with The Monetary Authority of Singapore2. Fund AUM is $400mm, while strategy AUM is $500mm+.
The manager expects elevated levels of volatility for Asia and EM credit in 2022 (which they view as supportive to the strategy). They have identified several actionable long and short investment themes for 2022. Some of these themes include 1) Today's distressed stage of EM credit cycle 2) China property 3) Commodity super-cycle 4) Resumption of EM growth and mobility (albeit non-synchronized).
Greater China L/S Equity:
Despite challenging market conditions in 2021, our Greater China L/S equity manager generated a net return of +11.26% for the year. The fund’s long and short books were profit centers and the team generated positive returns throughout HK, US ADR, and China A-share exposures. While difficult to qualify, we’ve heard from investors that the fund’s portfolio positions have been highly differentiated from other Greater China L/S equity peers given a large percentage of the fund is typically invested in deeper value traditional economy names with strong earnings growth catalysts rather than high exposure to new economy tech, online consumer, and internet.
This manager runs a high conviction long book and a more diversified short book. They tend to focus on “less crowded” stocks and sectors which include cyclicals/industrials and offline consumer companies. The Fund has now achieved 1,000+bps of annualized excess performance above the MSCI China index4 with an annualized net return of +18.5% since inception. Impressively, the Fund has achieved positive performance every calendar year since inception. The fund has outperformed the MSCI China Index by 2,500bps+ in both 2018 and 2021 (years of significantly adverse China equity market conditions). The manager is excited about 2022, and sees attractive valuations, supportive PBOC policy in their areas of focus, and the expectations for a gradual improvement in China’s economy.
The manager anticipates the scheduling of a U.S. roadshow later this year to meet with current and prospective clients.
U.S. Structured Credit/CMBS:
Our U.S. CMBS specialist had strong performance in 2021 with a net return of +17.4%. The Fund benefited from capital inflows in 2021 and now has a 10-year track record with an annualized net return of +11.93% since inception. This group focuses on distressed, stressed, and event driven CMBS opportunities.
As it stands today, large swaths of the CMBS market remain stubbornly dislocated and potentially attractive from a relative and absolute perspective. The Fund is focused on shorter duration idiosyncratic credit that 1) can be purchased at large discounts to face, 2) offers strong upside convexity with positive carry, and 3) has strong structural credit support. The manager believes the next 2-4 years will provide ample opportunity largely driven by 1) the pandemic induced U.S. CRE/CMBS dislocation and 2) perennial inefficiencies of the asset class mostly due to complexity and information asymmetry. The manager is particularly excited about distressed and stressed credit CMBS bonds that are trading in the ~$0.50-$0.75 $ px with an expected underwritten exit at or near par.
We think it’s important to share some historical context. In the years leading up to covid, incredibly tight credit spreads across securitized products led to several years of a low return regime for many market participants (at least those that didn’t employ significant external leverage). Many of those highly leveraged market participants subsequently went on to experience significant mark-to-market/crystalized losses in March of 2020. It’s also true that periods of substantial price dislocation and credit spread widening, much like the GFC, have historically led to a favorable backdrop for structured credit investors. We believe this to be the case within CMBS given its proximity to the covid induced CRE dislocation. We view a CMBS specialist approach as a unique way to achieve targeted non-dilutive exposure to this thematic trade.
Asia/Asia Themed Late-Stage Growth Equity/Pre-IPO Fund II:
Our manager is currently in the market with their late-stage growth equity Fund II. The Fund focuses on enterprise SaaS, fintech, consumer, and the healthcare/life science sectors. Fund II currently has $285mm of capital commitments with a target fund size of ~$350mm. This includes a strong re-up rate from Fund I investors. Fund II is actively deploying capital and has invested 60% of committed capital across 7 portfolio companies located in Japan, Indonesia, South Korea, and Asia related companies in the United States/Global.
Fund II has limited capacity remaining and a narrowing timeline as it approaches its final closing. Fund III is expected to follow in late 2022/early 2023.
Fund I held its final close in July 2020 with ~$235mm of committed capital has generated a gross 2.4x MOIC with an +84% gross IRR since inception. Nearly half of the Fund’s 13 investments have achieved liquidity and/or realization events. 3 portfolio companies have generated 4x+ MOIC and the Fund recently made its 1st distribution (~45% of investors capital commitments).
This manager is a multi-billion firm with offices in Hong Kong and the United States. The firm has a sizable long only public equity business which enables them to be long-term shareholders well after an IPO.
Asia Direct PE Secondaries Fund V:
We’re excited to be coming to the market with a well-established manager that specializes in China, India, and Southeast Asia direct secondaries and PE fund restructurings (sector emphasis on next-gen consumer, technology, and healthcare). This manager is now raising their Fund V which is targeting ~$500mm of commitments. Over the last 10 years it is estimated that Asian PE funds have raised ~$1.8+ trillion and have made distributions of ~$800 billion7. The manager estimates there is $500 billion of unrealized Asia PE assets held by funds that are 6+ years into their life cycle8. With the current challenges facing Asia’s capital markets, a confluence of factors on the part of motivated sellers, the manager believes this is an attractive backdrop to deploy capital into what they believe are significantly “de-risked” high quality assets (particularly so in China where valuations have come down).
This team has invested $1bn+ over the last 14 years which includes ~$100mm of partner capital9. The manager employs an active approach to investing in 1) direct single asset secondaries and 2) PE fund restructurings which entail the purchase of one or more assets rather than an entire fund portfolio (not to be confused with GP continuation funds). Over the last decade, the team has built a strong network of sponsor and entrepreneur relationships throughout Asia which often leads them to the pole position of “first call”.
On the single asset side, they generally target companies in the $200mm to $1b valuation range with revenues of $25-100m. With respect to Fund restructurings, they target strong PE sponsors, that are motivated sellers with total transaction sizes of <$150mm (both of which result in very low competition as these deals are simply too small to move the needle for most large PE secondary fund investors that require larger transactions). Fund V is targeting a 1st closing in the late Q2/early Q3 2022.
We recently held a quick 15-minute educational Q&A with the manager where they discuss the evolution of Asia secondaries, nuances related to Asia secondaries, and the current opportunity across the targeted geographies. Please let us know if you’d like to listen to the recording
Digital Assets and Related Blockchain Technologies (Public and Private):
Over the last several years, investor interest in digital assets and blockchain related technologies has increased alongside the meteoric rise of these new asset classes. We’re currently in dialogue with several emerging and established managers that employ a variety of methods by which investors can achieve actively managed exposure. To the extent digital asset related investments are of interest, it would be great to connect further on these topics.
BridgeWood Firm Update:
Lastly, we’re pleased to share updates regarding firm milestones, our business, and our team. The challenges brought about by Covid have been significant as we’ve heavily stacked our chips on opportunities mostly emanating from Asia given our level of conviction in the value proposition of the region. Despite these headwinds, 2021 was a year of tremendous growth for our business and we’re really excited with the strength of our current lineup, the quality and uniqueness of our pipeline, and the cadence of manager flow coming through our network.
On the team front, Chris Healy, who joined in 2019 has been promoted to a partner where he leads our on-the-ground North American institutional coverage from New York. We added two additional senior team members in Hong Kong in 2021. Calvin Hsu joined as a Managing Partner and Responsible Officer for BridgeWood Alternatives, which we licensed with the SFC in Hong Kong (Type 1 and Type 4). Calvin has 24+ years of experience in private banking working with UNHW families in Asia. James Fallon also joined the Hong Kong office in 2021 as a principal. James has 20+ years of experience in Asia and the U.S. where he’s held senior cap intro, business development, and COO roles with major banks and Asia based managers. BridgeWood continues to conduct North American private placement activities as registered representatives of Butler Capital Partners, a U.S. registered broker-dealer and Member of FINRA/SIPC.
We’ve also welcomed 3 new members to our independent advisory board over the past 6 months which provides a deeply experienced sounding board designed to heighten our level of objectivity. The advisory board is mostly comprised of institutional allocators and professional investors with diverse backgrounds and expertise.
We continue to build upon an expansive and highly curated network of industry partners. These like-minded firms and professionals deepen our global sourcing and distribution capabilities across markets, strategies, and geographies.
As always, thank you for your continued support.
“In and around our network”:
Aside from the select mandates we highlighted, we see exceptional deal flow sourced internally and from our partner network. The below illustrates several current and prospective opportunities for context:
Early-Stage China VC Fund V: Firm is a spin-out of a large global VC firm. $500mm target (80%+ committed). Focused on consumer, enterprise, deep tech (blockchain, web3.0, metaverse). Concurrently raising $300mm MVP Fund ($200m committed) for later stage Series B follow-ons.
Digital Asset/Blockchain VC Multi-Manager Fund I: Multi-strategy exposure to “all thing’s digital assets” including crypto, tokens, blockchain, DeFi, Web.30, play-to-earn, metaverse, etc. by investments in hard to access established VC funds, GP/LP stakes in specialized emerging managers, and direct equity investments/co-investments. Targeting $50-100mm fund size.
US Medical Device and Digital Health VC Fund II: Highly pedigreed and experienced team, investing in high growth next generation medical devices, specifically focused on neuromodulation and electroceuticals. Target raise $250mm.
Asian Renewable Infrastructure: Hong Kong based investment firm providing capital to curated local developers of mid-market ($10-75m) green energy infrastructure projects (solar, wind, energy storage, etc.) across Asia.
U.S. low net L/S equity: Newer launch founded by experienced PM who has managed a similar strategy at large scale within multi-strategy hedge funds that include Point72, Millennium, and Citadel.