APAC Forum 2023: the SMEs that are ‘hard to kill’

A lack of financing in the past has made small businesses in southeast Asia resilient, a characteristic welcomed by the private debt managers now stepping into the funding gap.

“They’re like cockroaches, extremely hard to kill,” said Shuyin Tang, co-founder of fund manager Beacon Fund, referring to SME businesses in southeast Asia. “It would be naïve not to acknowledge the challenge these businesses had during the pandemic but a lack of access to capital meant they developed a laser focus on cashflows in order to survive.”

Tang, whose firm focuses on supporting women entrepreneurs in the region, was speaking on a panel on emerging private debt opportunities in Asia on day two of Private Debt Investor’s APAC Forum 2023 in Singapore. Beacon invests small tickets – a few million dollars or less – in businesses where it can make a social impact. “We’re often the first non-bank lender, or even the first lender, and it can take a lot of effort getting borrowers up to speed,” she said.

“The pandemic reinforced core beliefs about the need to be local in markets like Vietnam, Indonesia and the Philippines,” she added. “We don’t have great legal regimes and having local networks is a better way of protecting against downside risk than any document can.” That said, Tang stressed that the low leverage levels, attractive pricing and flexible covenants available currently were all factors in helping the firm achieve its target outcomes.

Wei Hsien Chan, a managing director at Singapore-based fund manager SeaTown Holdings, agreed that bespoke structures, covenants and collateral backing were all advantages for private credit since “you don’t see them in public bonds”. SeaTown launched its private credit strategy just before the pandemic and, unsurprisingly given the timing, Chan said the firm had been extremely selective in its underwriting – executing on only around 5 percent of potential deals.

“We have a pretty strong position on covenants and we’re happy to walk away for others to take the risk,” said Ryan Chung, head of structured finance and principal investment at fund manager Huatai International. “We have industry specialists on our team and so we’re able to put in a lot of specialised and technical covenants. That’s how we protect ourselves.”

Chan described another form of protection: “Lots of stress testing is necessary in this environment, including background checks since many of the businesses are family-owned. We have a very strong global network which can provide us with background information on borrowers and their trustworthiness. That’s a bit different from developed markets.”