Asia in transition: accessing new sources of private credit
Businesses that own, operate and develop energy transition infrastructure assets across Asia Pacific are in a sweet spot. They are set to benefit from the rapid pace and increasing scale of the region’s transition journey – which looks to be in the early phase of a decades-long investment cycle.
This significant opportunity cannot be underestimated. In Southeast Asia alone, where spending on clean energy represents only about 2% of the global total, average energy spend per year needs to increase to over $130 billion to align with the Announced Pledges Scenario by 20301.
Notably, allocations must also shift to cleaner technologies to meet the vast demand for infrastructure and network connectivity across both developed and developing markets.
In short, as transition accelerates, those companies which can unlock innovation to generate long-term sustainable outcomes for investors, society and the planet, will thrive. “This is particularly enticing for private market investors,” said Scott McClurg, head of private credit at HSBC Asset Management.
The allure of clean energy assets
HSBC Asset Management brings 35 years of experience and over $71.1 billion in assets under management solely in the alternatives space. The firm benefits from more than 127 dedicated alternatives investment professionals2.
HSBC Asset Management sees several reasons why investing directly in the transition journey in Asia is increasingly appealing. Firstly, the average transaction size for a clean energy project is anywhere from $30 million to around $250 million, instead of the multiples of billions for traditional infrastructure. “Smaller ticket sizes in this mid-market range create a wider investment universe, plus provide the opportunity for more co-creation and less intermediation,” said McClurg.
Secondly, these types of assets give immediate access to potentially stable and resilient cash flows and are a natural hedge against inflation. Regular income can be an appealing factor for long term asset owners.
In addition, compared with traditional, long-tenor infrastructure loans, transition-related projects are, by definition, new. The relatively short financing windows for these assets are around three to seven years. “As an underserved part of the market, there is a real illiquidity premium and we can potentially create attractive risk adjusted returns,” said McClurg.
As a result, he sees these shorter-dated, asset backed structured loans as an effective way for private credit allocators to diversify away from the traditional direct lending market. “This is a way to access an uncorrelated investment opportunity.”
Asia: a fertile transition market
A typical investment in the transition journey might, for example, be in a renewable energy platform with a focus on solar photovoltaic generation in North Asia. This enables access to mature markets which are transitioning to corporate off-takers of renewable power purchase agreements with strong demand.
“These are relatively lower risk, resilient assets whose relative illiquidity is compelling to investors,” explained Edith Lin, HSBC Asset Management’s head of institutional sales for South Asia and global head of insurance coverage.
Across Asia, flourishing areas in renewable energy – such as battery storage – and the electrification of transport, among others, are creating diversity in the private credit space.
Vietnam, India and Indonesia are three key geographies for investors to watch. The government in the latter, for example, has made its intention to shift away from coal very public through the launch of Just Energy Transition Partnerships (JETPs) looking to decarbonise polluting industries, while India is pioneering innovation around renewable energy and electric vehicles. Vietnam, meanwhile, is prioritising electrification.
In more developed markets such as Australia, the need for energy storage is now pressing given the volatility of electricity prices3, rising demand and aging coal power plants, and, as a consequence, McClurg forecasts significant investment in new, but proven, technology.
A competitive edge to private capital
Beyond the optimism about the future of clean energy and desire to make Asia “greener”, the risk/return equation ultimately needs to make sense when eyeing new assets. This is why investors are considering credit strategies.
“They want to see cash flows and for those cash flows to be locked in,” said McClurg. “They also need to see relatively low technology and execution risks.” This is increasingly important for insurance companies, for instance, as they navigate changing regulatory regimes, and may require their investment to create regular and foreseeable, low-volatility cash flows.
Such considerations reflect why asset owners need to be discerning in choosing managers, added Lin. “Private credit is crowded these days, and in some cases, the returns promised don’t always materialise.”
To deliver on this potential starts with a robust research process. “We specifically look at differentiated, high-quality deals, but we also reject many because they don’t meet all of our strict standards,” she explained.
Yet access to deals remains key. “Our connection to HSBC bank provides exceptional proprietary deal flow,” said Lin. “Corporate banking coverage across every sector and size of company fosters an array of investment opportunities spanning the globe, especially in Asia given the bank’s connections and reach. This gives us a first-hand perspective in a fast-changing set of economies.”
Making the transition pay off
Put simply, the potential for private credit is much wider than just the dominant direct lending space.
Capitalising on Asia’s transition journey can offer investors attractive returns from similar types of investment and allocation considerations versus more mainstream direct lending, but from an underlying asset with relatively lower risk, said McClurg. This is particularly true with the highest quality assets located in investment-grade markets which have strong net zero ambitions, like Japan, Singapore and South Korea.
The current macro backdrop is also supportive. Amid higher-for-longer interest rates and broadly higher inflation versus recent historical levels, appetite for assets with cash flows which tend to be inflation protected looks set to remain strong.
For HSBC Asset Management, these dynamics underpin the group’s ambition to facilitate $1 trillion of financing in this space by 2030. “We want to play our part, so the scale of the transition opportunity in terms of providing financing solutions to those projects is significant,” added McClurg.
Today, we and many of our customers contribute to greenhouse gas emissions. We have a strategy to reduce our own emissions and to develop solutions to help our clients invest sustainably. For more information visit https://assetmanagement.hsbc.com/about-us/net-zero.
Sources
1 - “World Energy Investment” report 2024. www.iea.org/reports/world-energy-investment-2024/southeast-asia
2 - HSBC Asset Management, 30 June 2024
3 - Australia’s Urgent Need for Energy Storage - https://www.energy-storage.news/australias-nem-urgent-need-for-energy-storage-in-worlds-most-volatile-electricity-market/
Disclaimer
For Professional Clients only. The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Alternative investments are generally illiquid and long term in nature. This material does not constitute investment advice or a recommendation to any reader of this material to buy or sell investments. Any views expressed are subject to change at any time. (Approved for issue in the UK by HSBC Global Asset Management (UK) Limited, who are authorised and regulated by the Financial Conduct Authority.
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