Private credit hits ‘tipping point’ in Asia as growth in Western economies stagnates

Private credit may have reached a tipping point in Asia as alternative asset managers flock to this fast-growing asset class, snatching stock from traditional banks and providing much-needed bloodline for businesses in the region in prey to COVID.

In a panel discussion at DealStreetAsia’s 2022 Asia PE-VC Summit in Singapore, seasoned alternative asset investors highlighted “a sea change” in Asia’s private credit market over the past decade or so amid robust economic growth in emerging countries in the region.

Investors said Asia had moved away from the previous generation of private bankers selling debentures to their wealthy clients to a new phase of more rigorous due diligence offered by private credit players.

“Where Private Credit excels is that we read all the paperwork, do the security, and make sure to throw the tires, visit the factory, and talk to the borrower,” he said. said Wei Hsien Chan, Singapore-based chief investment officer. management company SeaTown Holdings, which is a wholly owned subsidiary of Temasek Holdings.

Although private credit is still in its infancy, the market is expected to grow from an estimated total assets under management (AUM) of $1.2 trillion last year on the back of rising costs of capital. and falling valuations amid a global market slowdown.

As demand for capital continues to be strong in Asia, Nitish Agarwal, CEO and CIO of Singapore-based private finance firm Orion Capital Asia, said an influx of more sophisticated investors, legal executives “significantly improved” and a maturing ecosystem are among the main factors driving the adoption of private credit in the region.

“What we’ve seen change in 10 years is really on the supply side. We are seeing a lot more sophisticated institutional investors coming to Asia, both for diversification and for relative value,” Agarwal said. “I think generally Asian private credit has yielded 300 to 400 basis points over what you might get in other markets.”

Demand is growing as fund managers such as buyout funds seek private credit to support their transactions, and startups and unicorns seek fundraising alternatives to avoid a drop. To fill these funding gaps, some of the world’s largest fund managers have increased their holdings in the Asian private credit market in recent months.

Blackstone announced in May its goal of increasing the assets of its credit business in Asia-Pacific tenfold in the “short term”. The US alternative asset manager aims to expand its private credit assets to at least $5 billion from the $500 million committed in the fourth quarter of 2021. In the same month, Allianz Global Investors completed the first closing of its private credit fund for Asia-Pacific. at 450 million euros ($437.5 million). It aims to reach the final close of €650 million ($632 million) by the end of this year.

Singapore-based private equity (PE) firm Navis Capital Partners, which manages around $5 billion and is focused on the Southeast Asian market, launched a new private lending platform earlier this year. in Asia and hired former BlackRock executive Justin Ferrier as a managing partner.

The American alternative asset management company Apollo is also making progress in this area. He announced in June the formation of an Asia-Pacific credit strategy in partnership with Australian pension fund Hostplus with $1.25 billion in assets. In August, it formed a 50-50 joint venture with the Belstar Group to offer a range of private credit solutions in South Korea.

“There is an insatiable thirst for safe returns among customers in Asia,” said Matthew Michelini, CEO of Apollo Asia-Pacific, during the roundtable. “I think demand for credit will continue to grow in Asia.”

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Across the Asia-Pacific region, investors are focusing on private credit strategies, including direct lending, subprime debt, special situations and other segments that have seen a pullback from commercial banks.

Direct lending, a form of corporate debt provision in which non-bank creditors provide business loans without using an intermediary, is seen taking off in Asia at a time when its growth in Western economies is faltering.

“[The increase of direct lending] will be present in a few different and very investment-friendly geographies, including Australia, South Korea, India, and probably even, to some extent, Japan in the medium term,” Apollo’s Michelini said.

He said a “good start” for private credit providers like Apollo to find deals is where traditional banks have missed out, as more Asian businesses seek well-structured, personalized, flexible and priced appropriately to meet their demand for capital. He then highlighted trade finance, mortgages, climate and energy transition finance, as well as GP-LP exit repositioning solutions as some of the exciting areas to look for opportunities.

Among its recent landmark deals in Asia, New York-headquartered Apollo has reportedly increased its loan to SoftBank Group Corp to $5.1 billion, according to a Bloomberg report in March. It loaned an additional $1.1 billion backed by assets from SoftBank Vision Fund 2 after granting the Japanese investment group $4 billion last December.

For developing countries in Asia, venture capital debt is gaining traction as high-growth venture capital (VC)-backed startups increasingly accept alternative financing solutions.

Agarwal’s Orion Capital Asia, whose backers include Canadian public pension fund OMERS, secured its first venture debt deal in Southeast Asia in September by participating in an investment in the online travel app Indonesia-based Traveloka line. He backed a $300 million funding facility in Traveloka alongside other investors including Indonesian sovereign wealth fund INA, BlackRock and Allianz Global Investors.

“A lot of these companies have been very successful. They raised a lot of capital [financing], and now is a good time for them to consider whether the next dollar of capital should come from equity or debt. Obviously, what is happening in the equity market is not helpful on the fundraising side,” Agarwal said.

He predicts that venture capital debt will become “much more prominent and dominant” in the future.

Other credit strategies, including special situations transactions, are expected to remain in Asia to supplement direct lending, although investors may continue to have limited interest in the region’s non-performing loans (NPLs).

PNPs – in which the borrower is in default and has made no scheduled principal or interest payments for a certain period of time – have never attracted much interest, even during the Asian financial crisis, a said Denny Goenawan, managing partner at Indies Capital Partners.

Indies Capital Partners is one of Southeast Asia’s leading private credit-focused fund management firms, with approximately $800 million in assets under management across strategies ranging from private credit to private equity. Its private credit business has a strong focus on the Indonesian market.

“This [NPL portfolio] never took off in places like Indonesia and so on, largely because there is no structural or regulatory pressure from government for banks to clean up… Banks ended up just amortize losses over time instead of selling,” Goenawan said. “Because of this, there is not enough ecosystem.”

Orion Capital Asia’s Agarwal agrees, saying NPLs could increase in India, but not in a dramatic way that offers “outsized opportunities”.

With geopolitical uncertainties, global inflation, supply chain disruptions and other macro risks looming on the horizon, private credit investors believe Asia is now better placed to weather the storms. future market impacts.

“In Asia, we learned a lot of lessons the hard way from the Asian financial crisis more than 20 years ago. I think Asia has grown a lot in terms of strengthening balance sheets and reserves,” said SeaTown’s Chan. “But the stress will come. It’s just a matter of time.”

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