“Historically, LPs have allocated to credit opportunistically whereas today credit has become a strategic and important component in most portfolios. These allocations are only going to get bigger,” said Enrique Cuan, managing partner at Mercury Capital Advisors.
More specifically, he thinks investors’ interest in Asian private debt will increase substantially in 2017 due to private equity not having been able to generate expected returns. When investors factor in the risk-return profile of a credit fund, the performance is surprisingly similar to that of private equity but with much more stability and downside protection.
Another trend that Cuan is expecting is the emergence of private equity managers raising private credit funds to capture investor appetite.
“Part of the increased allocation to credit can be attributed to the larger traditional PE sponsors who have in recent years raised credit funds. Many of their LPs, who might not have had exposure to the space, have been slowly transitioned into the asset class through cross-selling across these platforms,” pointed out Cuan.
In terms of destination of capital, Cuan thinks most investors will continue to look at the asset class on a Pan-Asia basis.
“In Asia most investors are making regional bets for two reasons. Firstly, there just aren’t that many country-specific credit managers who are of an institutional quality, so choice is limited, and secondly the majority of investors are still relatively new to the asset class in Asia and prefer to diversify the risk and not limit their opportunity set,” noted Cuan.
“People just look for good managers and something that comes with a stable return and justifies the risk of being in Asia,” he added. He thinks there are a couple of large players that could potentially become the category killers with a small bunch of emerging managers trying to grab a share of the pie. But as the market is still yet to mature, investors do not have too many choices when it comes to private credit in Asia.
Cuan reckons that the consultant industry has played a very big role in promoting the credit space in Asia with a lot of big consultants in the region recommending credit to investors.