What do Blackstone and Allianz Global Investors have in common, beyond the fact they are among the world’s largest fund managers?
The answer: both see big opportunities in Asia’s private credit market. In May, Blackstone said it was seeking a 10-fold expansion in its private credit assets for Asia — from $500m currently to at least $5bn. AllianzGI closed a €450m Asia Pacific private credit fund the same month, with the aim of increasing it to €650m by the end of the year.
There are others eyeing Asia opportunities too. Private equity firm Navis Capital Partners, which mainly focuses on southeast Asia, set up a new Asia private credit platform in July.
US alternative asset manager Apollo tied up with credit and PE fund Belstar Group in August, setting up a joint venture in South Korea for private credit solutions. In June, Apollo formed a partnership with Australian superannuation fund Hostplus, focusing on the growing demand for private credit in the region.
Some investment banks have also set up their own separate private divisions, deploying their own capital, especially for special situations such as buyouts and acquisition financing.
Their timing is opportune — and the role they can play in plugging some of the funding gaps in Asia important — but the funds will have to navigate a regulatory quagmire across jurisdictions, as well as a relatively conservative attitude to borrowing money.
Asia’s private debt market is in its infancy given companies tend to rely heavily on bank loans to fund their businesses. But this year is different. A combination of global market volatility, higher interest rates and spikes in geopolitical tensions — from Russia’s invasion of Ukraine to mainland China, Taiwan and the US — have dented lenders’ appetites.
Banks are scaling back their lending — unless it’s for large and well-known names — while Asia’s bond market is pretty much shut to high-yield and lower-rated borrowers, while remaining open to higher grade issuers but at a cost.
Enter private credit funds to help bridge some of that financing gap. These are largely institutional investors such as asset managers, pension funds and insurers, that can support not only distressed situations, but also fund mainstream opportunities including direct lending, mezzanine financing and leveraged loans.
As bond markets remain closed and bank lenders take a step back, the hope is that more borrowers will be willing to diversify away from traditional sources of funding, offering an opportunity for funds to step in.
Asia’s loan bankers have long talked up the potential of private funds in the syndication market. A handful of US-style term loan Bs have been sealed in the past couple of years, but those trades have been driven mainly by banks, with just small chunks taken up by institutional investors. Australia’s private credit market has been solid, but its success has not spilled over to the rest of Asia Pacific on a grand scale yet.
There is some precedent, however, on the role funds can play. In early May, Indian conglomerate Adani Group’s subsidiary Mumbai International Airport scrapped a public bond due to volatile conditions. Instead, the airport operator placed a $750m private bond with funds managed by Apollo Global Management.
But institutional investors need to position themselves better. Small borrowers — from India, Indonesia, South Korea and mainland China — need funds to support their businesses but are dealing with wary lenders. Funds can help by complementing the region’s traditional syndication business.
It is not going to be easy. Most countries have their own set of rules concerning funding companies without a banking licence; markets such as India and Taiwan bar such financing. Taxes can be another headache, as are concerns about whether the enforcement of bankruptcy-related rules are lender-friendly or not.
The work required to make sense of all the private credit rules across Asia may be tedious, but the rewards could make it worthwhile. Private credit funds have the perfect opportunity now to nurture and develop Asia’s nascent market. They should grasp it.