This article originally appeared in Preqin’s Alternatives in APAC 2023.
APAC’s private credit industry is growing, driven by high-growth economies and the current position of the macroeconomic cycle. Tighter credit markets, bank retrenchments, a need for more flexible capital solutions and concerns around equity valuations are creating a perfect storm, stirring up greater appetite for private credit in a region that is relatively underserved.
Emerging markets hungry for capital
Much of the private credit growth is centred on mid-market, closing the notable financing gap felt by many small- to medium-sized enterprises (“SMEs”). This demand is being met from two sides: global managers seeking to diversify away from more mature markets in the US and Europe and capture the growth trends in Asia’s emerging economies; and private equity firms that are exploring private credit as risk-adjusted returns improve relative to equity.
Venture credit will also see strong demand, particularly in India and Southeast Asia as early-stage companies look to extend their cash runway and maintain current growth rates. There are still many high-growth sectors like in tech, healthcare, and education, and as valuation concerns persist amid macroeconomic headwinds, venture debt is an attractive option.
On the other hand, APAC’s more mature markets like Australia, Japan & South Korea continue their popularity for regional and global allocators looking to put large volumes of capital to work. Commercial real estate lending and private-equity-sponsor-led M&A have been a key focus as borrowers value the flexibility offered by private credit.
APAC markets are not immune from a slowing global economy, and we are also seeing a rise in distressed and non-performing loan activity, with a number of special situations funds being raised, in part, to seize opportunities presented by current market dislocation.
Gaining access to local knowledge
As APAC’s markets are heterogenous with unique legal systems, regulations and insolvency laws, access to local knowledge and networks is essential for managers. As Asia often has a relationship-led business culture, in an industry characterized by good due diligence, gaining access to local knowledge of partners and service providers is vital but often a challenge.
Meanwhile, private equity GPs in APAC interested in exploring debt strategies should appreciate that the required skill sets, tools, and operations required can be very different. As a relatively young asset class in region, there is a talent shortage in private credit, especially in popular jurisdictions like Singapore, which is gaining traction as an asset management hub for the region’s credit firms.
ESG in private credit
As investor demand for ESG-aligned assets is growing, lenders may find it challenging to exert influence on borrowers without the board seats or equity participation typically available in private equity deals. ESG-aligned covenants are, however, one method we see being utilized to align with LPs’ ESG and sustainability goals and to affect good sustainability risk management. With an influx of sustainability-led capital, private credit firms focused on ESG integration are well positioned in an increasingly competitive fundraising environment.
We also see a proliferation of climate-led, energy transition and decarbonization focused strategies in real assets or corporate lending, which are seeking to benefit from the trend that will define our market for a generation. With high growth markets, strong demographics and a growing sophistication of borrowers and lenders, private credit in APAC is likely to be a sustained growth story going forward.
