Private debt's growth in APAC faces key challenges
Private debt is growing as an asset class in Asia Pacific. However, factors such as limited investor trust and a less sophisticated market structure in the region are hindering its full potential.
“The heterogeneity of Asia-Pacific markets provides a constant source of deal flow across different countries,” Eddie Ong, deputy CIO and managing director of private investments at SeaTown, told AsianInvestor.
SeaTown, an alternative investment firm and wholly owned subsidiary of Temasek's asset management group Seviora Holdings, announced the final close of its SeaTown Private Credit Fund II (PCF II) on August 27. The fund raised over $1.3 billion in capital commitments.
Asia-Pacific private credit assets under management grew from $15.4 billion in 2014 to $92.9 billion as of September 2023, according to the latest data from Preqin, a provider of private markets data.
This represents a sixfold increase over the past decade and a 2.5-fold rise in the last five years.
“There is a significant funding gap in Asia Pacific, especially for SMEs, with unmet annual financing needs totalling $2.2 trillion. Private debt managers can address this gap by offering customized financing solutions to companies with more complex needs that banks struggle to meet, Harsha Narayan, AVP and senior writer at Preqin, told AsianInvestor.
LACKING TRACK RECORD
Despite the growth in private debt in the region, it still represents only about 3% of total private capital AUM in Asia Pacific and 5% of global private debt AUM, according to Preqin data.
The private debt market in APAC is still relatively new compared to those in North America and Europe. Many funds lack a long-term track record and may not have been tested across full credit cycles, Narayan noted.
“In today’s higher interest rate environment, investors may hesitate to consider fund managers that may not have been tested during the low-rate environment, when defaults and losses have historically been low,” she added.
Furthermore, while banks are scaling back, they still play a significant role in financing in many Asia-Pacific markets, particularly for larger corporations.
Investors may worry that since banks still represent a significant 79% of the total credit market in the region, it may be harder for private debt funds to gain traction and build a deal pipeline, Narayan noted.
Also read: Asia private credit lures global investors amid risk concerns
Still, SeaTown's PCF II was able to surpass the total commitments of $1.2 billion from asset owners, or limited partners (LPs), for its predecessor in the fund series, SeaTown Private Credit Fund I.
“We saw a good mix of LPs across institutions such as insurance companies, endowments and family offices. Our PCF II strategy is particularly attractive for LPs who do not need short term liquidity and are focused on generating income and capital preservation, within defined risk tolerances,” Ong said.
LOWER COMPLEXITY
Unlike in Europe or North America, where private debt is largely focused on direct lending solutions very similar to bank loans, Asia Pacific's markets require innovative and customised credit solutions, Narayan noted.
“GPs need local knowledge to help navigate the diverse economic conditions, legal frameworks, and business practices to create these solutions. They also need to build relationships with key stakeholders in the market and have strong networks that can help them effectively conduct due diligence and manage risks,” she said.
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The growth of regionally focused asset managers with deep knowledge of local markets can help originate high-quality deals, build trust with asset owners, and ultimately attract more capital, Narayan noted. There is also a need to educate asset owners to increase understanding of the nuances of private debt in APAC, especially through demonstrating successful fund performances.
“Strengthening legal frameworks and establishing clearer processes for debt recovery and enforcement of contracts across Asia-Pacific countries can also help reduce the uncertainty associated with private debt investments,” Narayan said.
DIFFERENT OPPORTUNITIES
SeaTown's Ong also sees some work to be done to ease asset owners' concerns about the regulatory frameworks in various Asia Pacific markets. Discerning LPs considering investments in private credit typically focus on the downside risks of their investments and how they are mitigated, he noted.
“It is warranted that a key concern of LPs is the complexity of enforcing loan protections and securing collateral when things go sour in a region as diverse as APAC, given that various jurisdictions are at varying levels of capital markets development,” Ong said.
Conversely, the diverse backdrop gives the region's private credit markets an edge compared to the more homogeneous markets in the US and Europe. Asset owners familiar with private credit and its risk profile see APAC private credit as a reliable form of diversification in their income allocation, Ong emphasised.
“Unlike other markets such as the US and Europe where economic activity moves in tandem, the economies of APAC are asynchronous, which means that there will always be good opportunities for us to invest in the region no matter the broader economic cycle,” Ong said.