Private credit may be on cusp of 'further boom'
Institutional interest in private credit is showing little sign of abating, as evidenced by a newly-released BlackRock survey and recent comments from family offices and regulators.
About 68% of institutions in the Asia Pacific plan to increase allocations to private credit, according to BlackRock's global private markets survey 2023 released on April 18.
The survey covered more than 200 global institutions managing over $15 trillion in assets under management and included pension funds, family offices, insurers, family offices and sovereign wealth funds.
BlackRock's findings are similar to what Asian asset owners have told AsianInvestor in recent months.
Nan Fung Trinity, the family office of Hong Kong business conglomerate Nan Fung Group, for instance, told AsianInvestor it plans to add positions in the private credit and distressed credit space, especially through secondary deals, amid rising interest rates.
The family office also plans to increase allocations to private markets this year.
TRIPLE EFFECT
Alternatives such as private credit, infrastructure and real estate became an asset class of choice for several institutions hunting for returns in a low-rate environment over the past decade.
With rising wealth and growing sophistication of investors, demand for alternative investment products has soared.
The size of the private credit market tripled to US$1.2 trillion between 2012 and 2022, noted another private market sector report by Alta and Aletheia Capital, released on April 18.
Even as many central banks lifted rates in the past 18 months, the appeal of these assets continues.
“Private credit may be on a cusp of a further boom in a rising rate and inflationary setting,” the report said.
Even financial hubs such as Singapore are looking to further develop their alternatives ecosystem.
The Asian private credit market expanded by almost 30 times in the past two decades to over US$90 billion in June 2022 from US$3.2 billion in 2000, Lim Cheng Khai, executive director, financial markets development at the Monetary Authority of Singapore said in a speech in late March.
More than half of the top 50 global alternative asset managers have already set up shop in Singapore, he said.
"There is a growing pool of institutional investors and asset owners, including public pension funds, endowments and family offices in Singapore. And they are allocating into alternative assets," said Lim.
“This ecosystem presents private market General Partners with co-investment opportunities alongside their institutional Limited Partners, and also allow their portfolio companies to tap into an expanded business network,” he noted.
DIRECT OPPORTUNITIES
Even with higher rates boding well for public market yields, private debt holders can expect attractive returns across the investment/financing spectrum, according to BlackRock.
And while recent banking blowups have rocked financial markets, they may also provide an opportunity for the addressable market of direct lending to expand, as some regional banks take a more conservative approach to lending, the world’s largest asset manager noted.
“In direct lending, for example, most deals have floating-rate structures that lead to higher yields as rates rise,” the BlackRock report said.
Direct lending may also be more appealing to borrowers given that deals aren’t subject to a bank’s ability to syndicate to a wide range of investors.
REAL ESTATE INTEREST
The biggest opportunities in private credit are in infrastructure or real estate debt, driven by expected tailwinds from recent US infrastructure legislation and what some see as a temporary dislocation in property values as a result of higher interest rates, according to BlackRock.
That echoes what industry experts told AsianInvestor recently, one of which said real estate debt suits institutional investors with a larger appetite for risk, such as private wealth clients, family offices and endowments.
Distressed strategies come in at a close second, according to the survey, as many investors view a potential recession as a catalyst – especially at a time when elevated borrowing costs are pressuring corporate balance sheets across much of the globe.
Meanwhile, in emerging Asia, venture debt may be at the heart of the private credit opportunity, Alta and Aletheia Capital’s report noted.
This story has been updated in para 9.