According to industry insiders in 2017, private debt markets were well placed to continue their exponential growth for a second decade, especially if global interest rates and credit spreads were to remain relatively depressed.
Over a ten-year period, from 2006 to 2016, private or alternative debt assets under management globally had increased by almost threefold to $200 billion, according to data provider Preqin.
Some of Asia’s largest investors, including Korea’s Public Officials Benefit Association, the Hong Kong Jockey Club, the New Zealand Superannuation Fund and Australia’s Cbus, helped to extend the private debt trend in 2017 by significantly increasing their allocations to the asset class.
Pension funds and insurers accounted for roughly 50% of the investors in Asia engaged in private debt markets, with the remainder being foundations, endowments, family offices and sovereigns, Yang Mei-ni, principal at Mercer Private Markets in Hong Kong, told AsianInvestor at the time.
In the wake of the global financial crisis, new rules forced bank lenders to reduce their lending to sub-investment grade and middle-market corporate borrowers, which opened the door and created demand for alternative lenders to enter the market.
“Traditional providers of that financing are changing as banks are more constrained and other investors like insurance companies and pension funds are filling that void. We’ve seen insurers who have been stuck at the investment grade level looking at being in the sub-investment grade level,” Linda Cunningham, head of debt investments at Australian super fund Cbus, told AsianInvestor in 2017.
While allocations to private debt also flourished across sectors from buyout activities in private equity to big ticket asset—Chris Redmond, global head of credit at Willis Towers Watson told AsianInvestor he was “genuinely not sure” whether the boom would extend beyond that current cyclical environment and would likely depend on the persistence of a low interest rate environment.
Private credit markets have shucked some of the expectations of the industry experts of 2017 and continued to boom in 2022 despite a high inflationary environment and unprecedented rate hikes.
Global private debt assets under management have increased more than five-fold since 2016 and currently sits at $1.3 trillion, according to Preqin data.
Meanwhile, Asia-based private debt assets under management have more than doubled in the same period and now sit at $80.5 billion. Over 303 institutional investors from Asia have committed to a private debt fund at one point in time since 2016, and 52 of them are insurance and pension funds, according to Preqin.
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.
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. This development is a stark contrast to what investors may have expected following the US Federal Reserve’s taper tantrum of 2013, said Bhandari.
“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,” he said.
“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,” said Bhandari.
The $396 billion Canadian pension fund, CPP Investments has stated that China and India will continue to be their key focus in Asia when it comes to private credit.
“In India, strong fundamentals and regulatory developments continue to bolster the private credit market which is showing a healthy growth trajectory,” said Raymond Chan, head of APAC credit at CPP Investments.
“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.
With further interest rate hikes widely expected, it is projected that private debt will continue to attract more attention from traditional fixed income investors, according to Preqin.