The stock market plummeted by 5.2% at the opening! Following a series of declines last week, the Australian stock market experienced its worst trading day since May 2020.

This inevitably reminds many people of the "circuit breaker storm" brought by the COVID-19 pandemic in March 2020. All sectors are falling, especially the technology sector, which is particularly sensitive to interest rates, with a drop of more than 7%.

The main reason for such a huge market fluctuation is the latest inflation data in the United States last Friday (June 10), which "reached new heights" at 8.6%, a level not seen in 40 years. This has led to a significant increase in expectations for a substantial interest rate hike by the Federal Reserve.

Under the severe pessimism in the market, the three major U.S. stock indices, following last week's consecutive sharp declines, opened with a gap yesterday (June 13) and all set a new low for the year.

What is particularly noteworthy for investors is that the benchmark index of the global market - the U.S. S&P 500 - after three days of sharp declines, has fallen by 22% from its high at the beginning of this year, meeting the criteria for a technical bear market.

This week is the "Super Central Bank Week", and the Federal Reserve will hold a monetary policy meeting (FOMC) at 2 p.m. local time on June 15. Some economists from institutions have even given predictions that there may be a 100 basis point interest rate hike.

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This means that the significant market fluctuations are far from over. The Australian Financial Review (AFR) has already used "nowhere to hide" to describe today's market.

Even Australian resource stocks and bank stocks, which have shown certain safe-haven attributes this year, are also hard to escape this disaster, with a series of heavyweight blue-chip stocks plummeting.

The current economic situation is even more uncertain than at the beginning of 2020. For investors, is it really only a matter of "selling and leaving the market"? Are there better ways to defend against risks?What are new types of defensive assets?

Due to the severe market fluctuations this year, many investors have started to pay attention to defensive assets, choosing value stocks in stock market investments, and increasing the allocation of bonds or gold.

However, in this round of market crashes, the defensive nature of these assets has gradually failed.

Take bonds as an example, because what the world is facing now is an inflation crisis. As central banks around the world raise interest rates significantly and gradually reduce bond purchases during the pandemic, the supply and demand relationship in the bond market has changed, and the pressure on further rising yields has increased significantly.

The failure of traditional safe-haven assets forces investors to change their thinking. So, what kind of assets can "jump out of the three realms and not be in the five elements"? EY once proposed such a view in the report "Why Private Equity Funds Can Withstand the Next Economic Recession": Private Equity (PE) investment cycle is relatively long, and it will not be passively trapped in the global financial crisis, but can better predict the crisis and respond more agilely.

From the global capital market dynamics since this year, there is a continuous trend of asset allocation around the world tilting towards private equity. Private equity investment, which can span cycles and is limited by market fluctuations, may be the new type of defensive asset.

Gao Songyu, CEO of Boman Australia Wealth, has been studying the situation of international private equity investment in Australia for many years and believes that from the various attributes of private investment, this type of investment can indeed make investors' asset allocation more defensive.

Private defense attribute 1: a large amount of capital tilt

From a global perspective, unlike the "mourning" in the primary market, the private equity market is very active. In the first five months of 2022, the global private equity-backed merger and acquisition transaction amount reached a record $471.2 billion (65.78 billion Australian dollars), a 14% increase compared to the same period last year.

As heavyweight institutions in the private market focus on Australia and deploy a large amount of capital, the merger and acquisition transaction amount supported by private equity and targeting local enterprises in the first five months soared to a record 40.1 billion Australian dollars, more than twice that of the same period in 2021.Refinitiv's data indicates that from January to the end of May, private equity firms conducted 61 transactions targeting Australian businesses, marking the highest number since 2000. Among the acquisitions announced in 2022, the most notable and high-value deal was the AUD 30 billion acquisition of Ramsay Health Care, a private hospital operator listed on the Australian Securities Exchange, by a consortium led by U.S. private equity firm KKR. This transaction was initially announced in April, with KKR raising its offer in May.

Statistics show that there have been a total of 263 mergers and acquisitions in Australia backed by private equity funds, with a total market value exceeding AUD 100 billion, reaching an unprecedented level. This has led to global investment opportunities in Australia reaching nearly AUD 4 trillion by the end of 2021, twice the size of the local stock market.

These figures all suggest that despite central banks tightening monetary policy to control surging inflation, the Australian market environment remains attractive to private equity.

Private Equity Defensive Attribute 2: Ample "Dry Powder"

The reason why the private equity market can remain so active in the current economic environment is that the level of "dry powder" is high, sufficient to support robust merger and acquisition activity.

"Dry powder" is an industry term referring to the funds that private equity funds have raised but have not yet utilized. Data released by S&P Global in February shows that the "dry powder" in the hands of private equity has increased by another AUD 2.5 trillion, approaching the highest record level.

Indeed, historically, bear markets affect confidence, and a decline in confidence affects mergers and acquisitions. However, mergers and acquisitions have not shown a significant downward trend so far, as there is a substantial amount of capital yet to be allocated.

The massive acquisition of Ramsay Health Care was not only led by a single global private equity giant, KKR, but also included several sovereign wealth funds and domestic superannuation funds (including industry superannuation giant HESTA).

Private Equity Defensive Attribute 3: Significant Differentiation from Secondary MarketsIf one were to enumerate some of the significant mergers and acquisitions in Australia this year, it would become evident which local enterprises are attractive to international capital.

Take, for instance, the Canadian giant Brookfield, which has been quite active in Australia in recent years. Not only did it participate in the acquisition of the largest coal-fired energy company AGL, but it also purchased half of the shares of Intellihub, a smart meter company, for AUD 1 billion from the largest local private equity firm PEP. This demonstrates its optimism for new infrastructure in the power sector.

In fact, in recent years, the vast majority of large-scale private equity mergers and acquisitions in Australia have come from global giants like KKR and Brookfield. They tend to seek out Australian companies with strong business capabilities and bargaining power. These institutions have robust international business capabilities that can help local enterprises develop more comprehensively to achieve more substantial returns.

A report issued by the local law firm HWL shows that the main industries in Australia's mergers and acquisitions market are industrial, information technology, and non-essential consumer goods, which differs from the three major weighted industries in the Australian stock market—mining, finance, and real estate. This also highlights the differences in overall allocation between the primary and secondary markets.

Private Equity Defensive Attribute 4: Long-term Good Rate of Return

Why are international private equity firms so optimistic about Australian assets? The answer is simple: there are good investment returns.

Due to significant fluctuations in the secondary market this year, some asset prices in the primary market have also been adjusted downward, which has given international private equity firms an entry opportunity.

Looking at the long term, the annualized rate of return on investments in top-tier private equity in the Australian primary market can reach 18%, which is significantly higher than the return levels of local stocks and real estate.

If you had invested AUD 100,000 in Australian real estate ten years ago, the current asset value would be approximately AUD 267,000. However, if you had invested in high-quality Australian private equity assets, the asset value after ten years would reach AUD 523,000, almost doubling in value.Despite the market being impacted by geopolitical and macroeconomic headwinds this year, private equity firms are likely to remain opportunistic due to the unprecedented capital pool raised during the pandemic—investors may seek longer-term investment opportunities (spanning the entire cycle) with higher returns if they believe it is necessary to weather this high inflation cycle through an entire bear market.

How can ordinary investors participate?

Although investing in private equity is a relatively reasonable investment direction at present, the entry barriers for private equity investments are usually high, making it difficult for ordinary investors to obtain corresponding opportunities.

Furthermore, different private equity firms have vastly different investment fields and strategies, making the selection process challenging for investors.

The Bo Man Yuan Heng Fund, created by Bo Man Australia Wealth, is a fund of funds focused on top-tier global private equity strategies, targeting the global market and sourcing high-quality private equity assets worldwide.

The Bo Man Yuan Heng Fund Phase 2 continues the investment philosophy of Phase 1, continuously screening top fund managers in various niche fields, while achieving multi-dimensional upgrades in regions, industries, stages, and brands. Through the fund of funds platform, it comprehensively allocates top-tier private equity funds in the market, deeply engaging in leading enterprises in the fields of healthcare, education, software, consumer goods, artificial intelligence, and more, while also lowering the entry barriers for investors.