Institutions, family offices poised to place more bets on private credit

More asset owners are leaning towards private credit rather than private equity -- a trend seen likely to continue given the interest-rate and macroeconomic backdrop.
Institutions, family offices poised to place more bets on private credit

Private credit outperformed buyout funds by 4.5 times in 2023, according to one estimate and  expectations are growing among asset owners that this trend will persist.

“During the shift to a higher interest rate environment, many asset allocators became over-invested in private markets, as both public equity and bonds simultaneously sold off,” Kah Ken Kam, investment manager at Singapore-based single family office Wellco Capital, told AsianInvestor.

“The lack of markdowns and distributions [or profits returned to investors] by asset allocators has left the market overexposed to private equity, resulting in less new capital available for their new PE fund,” noted Kam.

Wellco Capital is the family office of LGB Group Malaysia. It invests in multi-asset strategies to obtain endowment-like returns over the long term.

Several asset owners have told AsianInvestor in the past 12 months about the allure of private debt, including Hong Kong-based insurer FTLife, sovereign wealth fund Indonesia Investment Authority, and Canadian pension fund CPP investments.


Dry powder reserves — the amount of capital committed but not yet deployed — have increased to $3.7 trillion, marking the ninth consecutive year of growth, according to a recent report.

“Interest rates are a bit too high for private equity to work, and there is a valuation mismatch between private and public markets,” noted Kam.

“Also, some funds have grown too large, similar to the situation in 2007 before the financial crisis,” he added.

Large fund sizes can present challenges in finding suitable investment opportunities and deploying capital efficiently.

Eddie Ong, deputy CIO, and managing director, private investments at SeaTown, shares these views.

“Private equity firms may still find it challenging to deploy funds due to high market valuations. Asset owners may find private debt more attractive, where returns are high relative to the historical rate environment. In addition, gradual interest rate declines would benefit private debt generally,” he said.

SeaTown is a wholly-owned subsidiary of Temasek's asset management group Seviora Holdings.

For private equity, the interest rate is less of a trigger to spur reinvestment for investors than a strong realisation or exit in an existing private equity fund.

Private equity exits in Asia Pacific (APAC) in 2023 plunged to $101 billion, falling 26% versus the previous five-year average, and declining 51% from its record-breaking level in 2021, according to a recent Bain & Co report.

A second factor was underperforming and unpredictable IPO markets, according to GPs. 

In contrast, APAC-focused private credit AUM is projected to reach a new all-time high of $115.9 billion at the end of 2027, representing a CAGR of 8.0% from 2021 to 2027.

However, buoyant public markets in 2024 could bode well for private equity over time, as more portfolio companies find liquidity and exit opportunities. Whether this happens remains to be seen.

“Our view is that interest rates have currently peaked, and this will be a positive for public and private equity markets in the longer term," Ong said.


In a scenario where debt remains expensive and leverage decreases due to higher interest costs, discussions revolve around where capital can be effectively deployed, and the areas that are capital-starved have already seen a valuation reset.

“[We are looking at] growth venture capital (VC) strategies in the US, private credit funds where the capital deployed is already high and rates locked in, insurance-linked strategies because no one chases for such yields anymore, US life settlement insurance funds for their zero correlation to equity and Brazil legal claims”, said Kah Ken Kam.

Martin Barnewell, part of abrdn’s multi-sector private credit portfolio management team, sees strong flows into public credit globally yet notes that investors, particularly insurance clients, are interested in  investment grade private credit.

SeaTown’s Ong noted there are two clear trends.

“Allocation of more capital towards private debt across global markets and institutional investor types compared to past portfolio compositions and a growing appetite for Asia private equity opportunities, given the depressed valuations relative to their developed market counterparts.”


Fuelled by growing investor interest in direct lending which is typically linked to floating rates, shorter term to maturity, and higher seniority in the capital stack, GPs are increasingly focusing on investments in the private credit area.

Michael Jones, managing director, PGIM Private Capital, is seeing strong traction towards mid-market direct lending strategies.

“These strategies involve investments with floating interest rates and a minimum locked-in interest rate, ensuring they remain advantageous if rates suddenly drop,” Jones noted.

Wellco Capital’s Kam added: “Simplistically, a hedge against inflation can be augmented by private credit through giving out a floating rate loan or very high fixed rate loans of say 10% plus, pricing in US dollars and being mindful of how loan collateral value responds to an inflationary environment.”

Nevertheless, some private market participants have raised concerns about growing risks in private credit markets, as leading managers rush to deploy cash from the fast-expanding sector.

Para 11 has been updated to reflect a revised quote from SeaTown.

¬ Haymarket Media Limited. All rights reserved.