US investors, Asia's ultra-rich drive growth in Asia-Pacific private credit
They said deals in India and Australia can fill the gap, while more investors within and outside Apac are allocating capital to private credit in the region. And the key sectors they are looking to lend to are infrastructure such as data centres, and renewable energy.
Last year, Apac-focused private credit fundraising hit almost US$5.9 billion across 33 funds, 7.5 per cent higher than the $5.5 billion raised from 32 funds in 2023, according to Preqin Pro data.
'Given the success of private credit strategies in the US and Europe generally, many of the funds from these markets view Asia as the next frontier, both from a capital deployment perspective and a market diversification perspective,' Shaun Langhorne, partner at law firm Clifford Chance, told The Business Times.
State Street is seeing more US credit managers looking to diversify into Apac. West Coast-based managers are looking for new growth ideas, according to Eric Chng, senior managing director for global alternatives at State Street.
'They have come to a point where they can only grow US for so much, they're looking for new ideas for growth. Recently, I had two conversations with two managers, each managing more than US$100 billion in private credit. They are asking me, how do I deploy to Asia?'
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The US remains the biggest market for private credit, which market players estimate is around US$1.7 trillion in global assets under management (AUM) currently.
Apac, which Preqin said accounts for 5 per cent of the global market, could grow at an annualised rate of 8 per cent until 2029 to US$160 billion.
In a State Street survey of 450 institutional investors over the world – 120 of them from Asia – 31 per cent said they would deploy more capital this year to developed Apac, a subset spanning Singapore, Australia, Japan, Hong Kong and New Zealand. That's up from 29 per cent in 2024.
American investors in Apac deals
A look at some of the biggest private credit deals in the Asia-Pacific shows the deep involvement of American investors.
These include India's biggest deal on record: a US$3.4 billion refinancing for conglomerate Shapoorji Pallonji Group. Investors include American managers such as Ares Management, Cerberus Capital Management, Davidson Kempner Capital Management and Farallon Capital Management.
Goldman Sachs Asset Management's hybrid fund – part of its private credit strategy – has also reportedly provided US$600 million to partially finance conglomerate Jubilant Bhartia Group's purchase of a 40 per cent stake in Coca-Cola's Indian bottling unit.
Another reason investors are showing more interest in Apac is the higher spreads they can get here, compared to the competitive and mature markets in the West, said Chng.
'Because it's so ultra competitive, the spreads are lower than what you get in Asia, and the outperformance of Asian credit is at the top of mind of a lot of Western fund managers … as a fund manager, if you know that you can get 200 basis-point extra spread on the same structure in Asia, you will find a way to get there.'
Spread measures the additional yield that investors demand for holding debt with a higher perceived credit risk than a safer bond, such as a government bond or an investment-grade corporate bond
Investor interest globally has been rising in private credit, the financing provided by non-bank lenders to companies. That's as returns have beaten those from private equity (PE) in the past three years, and where PE investors are facing challenges in exiting their current investments due to the volatile deal climate.
An Apr 29 report by index provider MSCI shows that private credit funds generated 6.9 per cent last year, exceeding the PE funds' return of 5.6 per cent. 2024 marked the third straight year of outperformance.
For Apac, the returns could be in the range of mid-to-high-teens per cent, said Chng.
More family offices getting invested
Within Asia itself, more family offices are allocating funds to private credit, as their liquidity needs and investment horizon are aligning closer to those of institutional investors.
'Family offices are now coming into private credit space in a big way, because they have similar needs to the institutional investors,' said Serene Chen, Asia-Pacific head of credit, currency and emerging market sales, and head of Singapore institutional sales at JPMorgan Chase.
While family offices comprise less than 10 per cent of the Asian investor base in private credit, interest is growing, Chen said. JPMorgan has also seen increased participation in private credit from Asian institutions, across local sponsors, insurance and pension funds, she added.
With the increased interest, market players said private credit managers have no problems securing capital in Apac.
These include Ares, which is raising another Asia special situations fund to boost its credit investments in the region. It's reportedly targeting a size no smaller than its previous fund, which hit about US$2.4 billion in 2023.
On Jun 12, Chicago-headquartered investment manager Nuveen announced the second close of its Australian commercial property debt fund, raising more than A$650 million.
Last month, Singapore-headquartered Granite Asia said it secured over US$250 million from anchor investors for its first private credit fund.
Active fund-raising
Market players noted that raising capital isn't an issue, especially as lower returns and the challenging exit environment for PE investments are leading investors to turn to private credit.
Some note that, with investors still preferring to steer clear of China – traditionally the biggest private credit market in Asia – the danger is borrowers may have the upper hand.
With a 'deep pool of capital chasing' limited pool of borrowers, some private credit fund managers could be tempted to impose less stringent terms to ensure deployment, said State Street's Chng.
Clifford Chance's Langhorne said it's not a clear-cut case that a deep capital pool would improve the bargaining position of borrowers.
Citing the Sharpooji Pallonji deal signed last month, he said: 'Demand was high and they were able to borrow a substantial amount in one transaction. However, given they are unlikely to be able to raise the same amounts of capital from traditional capital providers, the trade-off for the borrower involves meeting the returns the private credit funds seek, as well as accommodating the structure and protections required to deploy the funds.'
The loan tenor for that transaction is three years, with the yield on the zero-coupon bond hitting as high as 19.75 per cent.
'There is a lot of capital available for deployment, but that does not mean that capital providers are just throwing money at the borrowers seeking capital. The investment still has to meet their expected returns and risk expectations,' said Langhorne.
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