Alternative capital can fill the void as banks retreat

The gloomy economic outlook in the US and Europe is prompting banks to scale back their appetite for risk. Lending volumes in Europe have fallen heavily in 2022.^[1] And with the bond markets hamstrung by rising interest rates, many lenders are working through an overhang from major acquisitions that they would typically have sold into the capital markets.

Lenders in Asia Pacific have been less affected, partly because they stayed away from risky acquisitions, interest rates have been more stable, and banks are typically better capitalized than those in the US and Europe.^[2] Still, the uncertain outlook for the global economy is pushing banks towards bigger, safer borrowers, leaving smaller businesses short of the capital they need to reach their full potential.

Even before the advent of more challenging liquidity conditions, the International Finance Corporation estimated that Asia Pacific accounted for almost half of the $5.2 trillion unmet financing need among micro, small and medium enterprises around the world.

Alternative capital will be necessary to fill the gap.

Plugging Asia’s outsized funding gap

Asia’s alternative investment universe is expanding quickly. Over the past decade, Asia Pacific’s share of private equity assets under management grew 2.4 times faster than that of North America and 3.0 times faster than that of Europe. By 2021 the region accounted for 30% of the global total.^[3]

Private equity funds spent a record $296 billion in Asia in 2021, up almost $100 billion from the previous year.

But the arrival of high inflation, rising interest rates and tightening liquidity conditions have led to a sizeable dip in private equity activity in 2022. Not only are investors reluctant to take risks, but private companies are also unwilling to pursue equity financing given the depressed valuations in the current environment.

Private credit is rushing in

These conditions have set the stage for a boom in private credit and other alternative financing, which is growing rapidly from a small base. Realizing that there is now an unprecedented opportunity to take a leading roles in funding Asia Pacific’s growth, several big name alternative asset managers have announced bold plans to introduce or expand offerings in the region.

Also in response to prevailing economic and geopolitical uncertainty, investors and managers are shifting from unsecured lending to collateralized financing. The benefits include greater stability should central bank tightening persist and growth stall, as well as more diversified returns.

These benefits are not new, however. They have just become more apparent during the current bear market. EquitiesFirst has been offering professional, accredited and otherwise sophisticated investors the opportunity of securities-based financing for the past two decades, allowing such long-term shareholding investors access to low-cost funding throughout market cycles. Structured as a sale and repurchase agreement, at the end of the agreed term, we return the same number of shares to the investor, who then benefits from any appreciation of the underlying stock in the interim – a particularly valuable option for those reluctant to sell their positions during the current downturn.

EquitiesFirst generally provides financing equal to 60%-70% of the value of the securities, with shareholding investors retaining complete flexibility over the use of proceeds for business or investment use. They could use it to invest in their own businesses, diversify their portfolios, benefit from dislocations during market turmoil, or for any number of personal reasons.

With interest rates likely to remain elevated throughout 2023 and a recession in the US now seen as virtually certain,^[4] tight liquidity conditions are likely to persist until at least 2024. By offering financing on investor-friendly terms, we make it easier for long-term shareholding investors to ride out what could prove to be a protracted bear market.

More broadly, by providing a vital funding lifeline to businesses and entrepreneurs, alternative capital providers like EquitiesFirst are contributing to Asia Pacific’s economic rise at this critical juncture.

[1] https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/european-loan-growth-cools-as-banks-tighten-lending-standards-71731259

[2] https://www.privatedebtinvestor.com/could-2022-be-asias-breakthrough-year-for-private-credit/

[3] https://www.bain.com/insights/asia-pacific-private-equity-report-2022/

[4] https://www.bloomberg.com/news/articles/2022-10-17/forecast-for-us-recession-within-year-hits-100-in-blow-to-biden

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