Private credit’s center of gravity is shifting to Asia
Private credit providers are sharpening their focus on Asia Pacific. Until recently, private credit in Asia Pacific was little more than a footnote to the far more developed European and US markets. But with economic growth and demand for capital in Asia expected to outstrip that of countries in the West for the foreseeable future, the market is headily rapidly towards an inflection point.
Private credit functions as an alternative to bank lending or the bond markets, and can provide secured or unsecured funding. But it is underutilized in Asia Pacific: only about 7% of private debt assets under management are in APAC, even though the region accounts for around 37% of global GDP.
This is changing quickly. Fundraising in Asia overtook that of Europe in the first half of 2022, according to Private Debt Investor. A number of direct-lending giants have announced plans to expand in Asia in recent months, including Blackstone, which plans a ten-fold increase in its private credit assets in the region to at least $5 billion “in the near term”; KKR, which raised $1.1 billion for its inaugural Asian credit fund; and Apollo Global Management, which launched a $1.25 billion Asia credit strategy in June.
A vital lifeline
Big-name alternative asset managers are scaling up in Asia at an opportune time. With the high-yield bond and unsecured credit markets worldwide suffering a dearth of liquidity after an unprecedented era of easy money came to a crashing halt, private capital is providing a much-needed source of funding to the region’s businesses, many of which have yet to completely recover from the economic fallout of Covid-19.
As banks avoid taking on more risk in the current environment, private credit funds have also become a major source of funding for buyout firms seeking to finance mergers and acquisitions. In addition, private credit is helping to plug funding gaps for startups and unicorns, which want to avoid the dreaded ‘down round’ – namely, having to raise equity at a lower valuation than in previous rounds.
With the slowing global economy dragging down company valuations across the board, it may be a while before private companies get their next opportunity for an up round. And yet, sectors like tech, software and life sciences are likely to continue growing in Asia, building on a decade of world-leading growth. Given that many of the companies in these sectors are pre-profit, so cannot grow without external funding, private credit is giving them a vital lifeline.
Another important factor underpinning the development of private credit in the region is the establishment of the necessary legal frameworks to recognise collateral arrangements and offer an adequate level of security for investors. Although legal frameworks remain fragmented across Asia Pacific, the region’s more developed countries have generally established sufficiently robust and credible regulations, while the developing ones are working to strengthen theirs. This will support the market’s continued growth.
A wealth of opportunities
According to seasoned alternative asset investors in the region, the influx of private credit heralds a sea change, from which high-net-worth investors stand to benefit. Unlike the unsecured bonds they may previously have been offered by private bankers, investments in private credit funds can provide exposure to a managed portfolio of loans that are backed by rigorous due diligence.
As a provider of alternative financing, EquitiesFirst knows first-hand the importance of thorough due diligence, especially in a volatile market environment. Risks are also limited by the increasingly sophisticated, technology-based processes being applied to origination, underwriting and risk management.
We see the growth of private credit in Asia Pacific as a sign of the rising sophistication of the financial markets in a region that has been historically dominated by bank lending. As businesses and entrepreneurs turn to new sources of credit to support their ambitions, the market for alternative capital providers is poised for further growth.
Securities-based financing, as provided by EquitiesFirst, is keeping pace with these developments. One of the biggest benefits is the flexibility it provides. In contrast to the loans extended by traditional lenders in defined formats with specific conditions, securities-based financing offers a low-cost, flexible source of funding which places no restrictions on the use of capital.
Crucially, securities-based financing offered by EquitiesFirst to professional, accredited and otherwise sophisticated investors, allows such long-term shareholding investors to access liquidity while maintaining the upside potential of their underlying positions. And the arrangements are generally structured to be non-recourse, meaning that if an investor is unable to fulfil the terms of our financing, their liability does not extend beyond the securities on which the financing is based.
Private credit and securities-based financing remain underpenetrated in Asia Pacific compared to Europe and the US. But now that some of the world’s biggest institutional investors are making bold moves to expand their private credit offerings in the region, that gap should close quickly. The stage is set for securities-based financing and private credit in Asia to shake off the ‘alternative’ label and emerge as a vital and vibrant part of the spectrum of funding solutions.
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