This paper provides a roadmap for investors and policymakers seeking to understand the private credit market in Asia and its direction of travel. The report is based on ACC data and a series of in-depth interviews with industry leaders.
The publication outlines how Asian private credit managers are navigating the unique challenges of investing in the region and how the asset class will play a pivotal role in the region’s economic rebound from COVID-19.
Key takeaways:
Investor appetite for differentiated returns, bank retrenchment and borrower demand for bespoke finance solutions are fuelling the growth of private credit in Asia.
Private credit is facilitating inward investment into Asia - 77% of private credit capital raised comes from non-Asian investors. These investors include institutional investors, family offices and HNWIs.
Private credit in Asia currently finances a relatively small proportion of the economy and there is significant headroom for growth. The emergence of newer business models, growth of SMEs and an increasing need for infrastructure investment in the region will see private credit play a greater role in the financing of the economy.
Asian private credit managers combine lending to SMEs and mid-market businesses with a wider spectrum of debt strategies. These mixed and opportunistic strategies typically target returns between 13-20%.
Almost three quarters of private credit transactions are originated through direct relationships with a borrower, or through consultants and industry relationships. Borrowers are also increasingly attracted to the speed and flexibility private credit managers can offer. Only 10% of transactions are sponsored.
ESG and responsible investment considerations are central to the risk management and due diligence employed by lenders in the region. Government policy to encourage more sustainable business models, technologies, and consumption patterns in Asia is likely to create greater demand for private capital.
The fragmented regulatory environment in Asia means that investment expertise, knowledge of local regulatory frameworks and deal structuring are central to successful lending strategies in the region.
Reform of regulatory frameworks in some markets is encouraging the development of private credit in the region. Reducing barriers to private credit across the region will support the sector’s ability to support business growth, innovation and job creation.
Jiří Król, Global Head of the Alternative Credit Council commented, “The APAC region is seeing strong interest from private credit investors and managers alike. The early signs received so far, indicate that the industry is likely to play a major role in the regional recovery as banks continue to retrench from multiple business lines. Those who will be able to manage the diversity of local jurisdictions are likely to reap significant benefits. We are excited to be part of this amazing growth story and hope to provide useful resources to aid the industry’s development.”
Jolyon Ellwood-Russell, Partner, Simmons & Simmons added, “There is no doubt that when it comes to lending in Asia, there are plenty of challenges resulting from the sheer diversity of the region. For example, in areas such as licensing, enforcement of collateral and tax. That said, the characteristics of private credit in Asia are that it tends to be more bi-lateral, bespoke and flexible, which means that it is becoming increasingly attractive to borrowers as a means of debt finance. With the increase of bank disintermediation and retrenchment, private credit will play an increasing role in financing the future growth in Asia.
On the investor side, we are seeing huge interest from global fund manager clients wanting to establish Asian strategies or existing Asian managers growing their AUM and effectively deploying their dry powder into Asian assets.”
Alpha Tsang, Partner at EY commented, “Over the past decade, private credit has evolved from an opportunistic strategy to a sustainable source of capital for enterprises in the region. As the sector continues to institutionalise and scale, Asian private credit presents a tremendous opportunity for investors looking for risk adjusted returns that are diversified, and downside protected. Complexities in origination and sourcing, talent management, operations and reporting, tax, regulatory, and legal are high barriers to entry to new entrants, but also provide new opportunities for those firms that are able to skilfully manage.”
