Private credit’s rising prospects in Asia

It has been more than 20 years since the 1997 Asian financial crisis, and its offshoots can be found in a rapidly growing private credit investment across the region. According to a recent report from the Alternative Credit Council (ACC) obtained by Alternatives Watch, the variety of strategies and the assets under management by private credit firms in Asia are surging as there are nearly 40 managers now in the region with AUMs ranging between $500 million and $1.5 billion. The ACC collected stats from a questionnaire of 28 active private credit asset managers in Asia and then followed up with help from Simmons & Simmons and EY with interviews with the investment firms. Industry research suggests rapid growth in the region to a total of $57 billion in private credit across Asia. Observers say that the adoption of structures and strategies that are typical in more developed private credit markets is a sign that the growth of private credit offerings is well underway in Asia, with offices primarily in Singapore and Hong Kong. The ACC estimates that 77% of the capital raised is from non-Asian investors. The data indicate that 30% of capital raised by private credit managers comes from investors in North America. Meanwhile, European, Middle Eastern and U.K. investors account for 19%, 13% and 12%, respectively. These investors include pension funds, insurers and sovereign wealth funds, accounting for 41% of the capital allocated to Asian private credit fund managers. The majority (54%) of private credit funds formed in Asia are closed-end funds, according to the ACC survey. These structures have a fixed maturity, which aligns with how investors typically allocate to private credit on a global basis. Established credit funds undertake strategies that invest in more than one of the typical subsections of private credit, according to the survey. These funds mostly tend to operate more like an opportunistic debt fund that looks at a broad range of debt transactions reliant on event opportunities, borrower relationships and dislocations in the market, rather than focusing on one single sub-strategy. Nearly 80% of managers lend to SMEs or middle-market companies and nearly 60% to real estate debt. Roughly 40% or less allocate to trade finance, large corporate lending or distressed. Most private credit managers in Asia tend to focus on special situations or opportunistic lending. These deals typically involve borrowers that require a non-commoditized finance solution. For example, debt refinancing, project funding shortfall or an immediate requirement for bridge financing. Some managers also specifically invest in nonperforming loan portfolios. The typical investment objective of these private credit managers is to achieve returns of 13-20% over three to seven years, according to the ACC. An investment example is Hong Kong-based ADM Capital, which in July exited from its investment in Project Joy 2, which yielded a 20% IRR and a 1.55x cash-on-cash multiple. Project Joy 2 was an October 2017 senior secured lending to a Beijing based group of companies in the information technology sector. According to the firm’s announcement, the loan proceeds were used to finance Project Joy 2’s growth plan and revenue diversification via geographical expansion. Borrowers are increasingly attracted to the flexible characteristics of private credit -- particularly the speed and flexibility they can demonstrate compared to traditional bank lenders. According to a 2019 survey of SME activity in South East Asia conducted by EY, non-traditional financing and capital from alternative assets make up 43% of external sources of capital raised by SMEs. This clearly shows the proposition for borrowers in Asia to utilize private credit solutions is present and growing. ACC points to Asian emerging markets such as India, Indonesia, the Philippines and Vietnam that will likely require huge amounts of investment to meet the needs of their younger and rapidly expanding populations as a fertile area for investment. The continued growth in intra-regional trade and capital investments in Asia will likely require additional large-scale cross-border financing. Middle-market corporates involved in e-commerce, international trade and supply chains are also among the fastest growing business segments in the region. Experts said that these corporates are more likely than most to see the benefits of private credit in the same way U.S. and European mid-market companies have become accustomed to private credit as a viable funding source. Another area of interest is infrastructure, the survey of managers pointed to the demand for civil infrastructure (power plants, transport, telecommunications and sanitation) needed to sustain the economic development of various emerging Asian countries will remain substantial for many years ahead. In addition, the growth of e-commerce and the need for backing for new technology initiatives is another emerging area. Lastly, sustainable finance is also coming to fore as more institutional investors look to ensure they are investing with managers with ESG investment policies. A good number of firms are signatories to the UN PRI statement that has been widely circulated across the hedge fund industry. Demand for these debt products comes from both investors who need to show their funds are invested appropriately, and also from borrowers who recognize that sustainability can be rewarded with lower interest costs, according to law firm Simmons & Simmons. There are also several popular ESG-linked credits that are often provided by private credit funds to their borrowers, they added in the ACC report.

Private credit’s rising prospects in Asia

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