Investors in private credit are looking for opportunities across Asia as rising interest rates hamper public markets and activity in mergers and acquisitions.
Private credit — lending money to a company against an agreed-upon amount of collateral — has been a niche strategy in Asia compared with other forms of financing, such as private equity deals, bank loans and initial public offerings. But investors and companies are finding it increasingly attractive as high interest rates make other fundraising routes more expensive.
Private debt financing can include lending through fund vehicles as well as direct lending by end investors. A total of 38 Asian private funds raised $10.2bn in 2022 for such lending, compared with $2.2bn from 34 funds in 2013, according to data provider Preqin. Globally, 271 funds raised $242bn last year.
Asia is about a decade behind the US and Europe in private credit fundraising, though it is starting to catch up, said Shane Forster, the Hong Kong-based head of the Asia-Pacific private finance group at Barings, a US-based manager with more than $347bn in assets under management.
Barings, which entered Asia’s private credit market about 10 years ago, has deployed $500mn in the region this year, below last year’s figure of $1bn. The smaller deployment, Forster said, was due to the downturn in private equity deals, which often provide an opportunity for private credit investors to “tag along” and invest in the same underlying companies. Much of the capital Barings deployed this year went to existing portfolio companies seeking funds for acquisitions, he added.
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Forster said relatively conservative players favoured Australia, New Zealand, Singapore and Hong Kong, where legal frameworks provide more certainty if a company defaults on a loan. Those looking at emerging markets such as Indonesia, Vietnam and India could be seeking “equity-like returns”, with a trade-off coming in terms of potential complexities in getting hold of assets in the event of a default.
Barings has focused on industries with “recurring revenue” such as healthcare, education, core consumer staples and food. Some of the companies have been in business for decades, Forster said. The illiquid nature of private credit makes investors cautious about locking in their money for a long period, he added. The investment duration of private credit funds is usually half as long as private equity funds, which tend to be about 10 years.
Unlike private equity investors, private credit investors tend to be less focused on specific sectors and more interested in a company’s revenue and ability to offer downside protection, according to Xuong Liu, a Hong Kong-based managing director at the consultancy Alvarez & Marsal. It has seen more credit funds active in financing deals in the region this year.
Private credit is drawing the attention of regional funds, private equity firms, asset managers and family offices.
“We have seen the trend of funds raised and new funds established for private credit on the rise in the past 12 months,” said a founding member and managing director of an Asia-based private equity firm that is also looking to launch a private credit fund.
“For certain private credit transactions, there are private equity-like returns but with the added bonus of strong downside protection, less common for typical private equity investments,” he said.
The quarterly return of 22 Asian private credit funds totalling $12.6bn stood at minus 2.1 per cent as of the end of June, according to data provider Burgiss. That compares with a return of minus 1.3 per cent across 628 Asian private equity funds of $467.6bn it tracked in the same period.
The difference in the returns of the two asset groups has been narrowing since the third quarter of 2020, when 531 Asian private equity funds reported a quarterly return of 18.3 per cent, compared with a 3.8 per cent return from 24 Asian private debt funds.
At SuperReturn, one of the largest events in Singapore for limited partners to connect with venture capital and private equity managers, there were more signs of interest in private credit investments, according to participants.
More private credit players were speaking than in previous years, said Stephen Hull, Hong Kong-based partner and chief operating officer at private credit firm Zerobridge Partners. Institutional investors from the US and Middle East were also actively seeking private credit managers, he said.
Experts said private credit could be an attractive borrowing option for companies, especially smaller ones, that do not want to dilute shares by taking on private equity investors. Banks also tend to be cautious about lending to smaller businesses, particularly those deemed to be “asset light,” as loan quality becomes more of a concern for lenders during periods of high interest rates.
But deal sourcing and uncertainty over legal frameworks remain two key challenges for private creditors.
The US investment management company Invesco has recently started to look at India and China for private credit opportunities, but sourcing deals has been difficult. Onshore Chinese deals in renminbi terms are mostly taken up by domestic lenders, said Freddy Wong, the company’s head of Asia-Pacific fixed-income investing. Some companies might also worry about having assets locked up, as private credit funds are relatively illiquid, Wong said.
Yemi Tépé, global co-chair of the finance group at law firm Morrison Foerster, which has been looking at private credit deals for clients in Vietnam and Indonesia, said the demand from companies for private credit lending was there, but investors were cautious about lending to companies in emerging markets.
“A lot of the work that I’m doing right now is helping private credit understand those jurisdictions, understand the risks and work out how they’re going to navigate and how they’re going to get their credit committees comfortable,” she said.
A version of this article was first published on November 1 by Nikkei Asia. ©2023 Nikkei Inc. All rights reserved
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