Investor interest in Asia is turning increasingly towards private credit - a highly resilient sector amid mounting economic challenges - as public credit and the loan markets take a battering from rising inflation and interest rates.
CPP Investments, the Canadian pension fund with over $396 billion in assets, leverages its Asia-Pacific credit team to invest at both the asset and corporate level using various instruments, including leveraged loans, high-yield bonds, convertible bonds, senior and mezzanine loans and structured credit products which include non-performing loan assets.
Raymond Chan, head of APAC credit at CPP Investments told AsianInvestor that his team continues to seek out the best relative value across the credit spectrum to optimise its risk-adjusted return and provide solutions to its partners.
“Asia private credit deals tend to be more bespoke and tailored, we focus on selecting reputable counterparties, borrowers with strong cash flows or hard assets, and structures with appropriate creditor protections,” said Chan.
“China and India will continue to be our key markets in the region when it comes to private credit,” he said.
In India, strong fundamentals and regulatory developments continue to bolster the private credit market which is showing a healthy growth trajectory.
Meanwhile, the downturn in China’s property sector and the volatility in regional equity markets are two factors that have created more opportunities for bespoke private credit solutions, said Chan.
Sumit Bhandari, managing director and lead portfolio manager for Asia Private Credit at Allianz Global Investors told AsianInvestor that the interest of foreign institutional investors and asset owners in Asia’s private credit markets has seen a steady rise as they look to diversify their portfolios amid macro-economic uncertainty.
Since the establishment of AllianzGI’s Asia private credit team in 2018, it has successfully deployed capital in its target markets of Southeast Asia, South Asia and Oceania, with completed transactions to date now exceeding $600 million.
The firm focuses on performing middle-market companies, with a primary focus on Australia, India, Indonesia, Singapore and Vietnam.
Particularly in the face of rising inflation and interest rates, these large investors have been encouraged by the behaviour of Asia, as well as the way various currencies have behaved and local rates have reacted, which Bhandari says is in stark contrast to what happened with the US Federal Reserve’s taper tantrum of 2013.
Private credit in Asia has grown as an asset class by almost 500% in the last ten years alone and is still on a high growth trajectory according to Bhandari.
“There's always been higher returns and yields to be had in Asia, but I think the diversification potential is really coming to the surface now, and I think investors are really putting capital to work from that perspective,” he said.
Bhandari’s team sees a lot of opportunities in businesses that will see limited impact on their end demand despite the economic conditions - such as telecom towers, pharmaceuticals, data centers, or sectors that will show a quick recovery, such as healthcare, education, and business software.
“We think that private consumption tends to be more resilient over time and I think that's really where the theme of investing alongside increasing GDP per capita in Asia is coming from,” he said.
“The hunt for domestic demand and companies that are geared towards that stand to benefit from that increasing demand over time.”
According to Bhandari, the biggest risks for foreign investors looking to capitalise on Asia’s private credit opportunities remain “execution." Navigating the complexity of the region, he said, is "not easy.”
“I think putting boots on the ground is difficult, just because there are multiple regions, and those regions all have different geographies, different bankruptcy regimes, different regulatory environments," he said.