APAC private debt fundraising falters as LPs reassess risk

Private credit is making inroads in Asia but global investors need more convincing.

After a record year for fundraising in private credit in 2022, the amount of capital flowing into debt funds targeting the Asia-Pacific region tumbled in the first half of this year.

Limited partners previously attracted by higher returns in the growth economies of the APAC region pulled back for a wide range of reasons, among them currency exchange concerns and geopolitical risks.

In all, 32 funds collected a combined $15.7 billion for APAC private credit in 2022, up 34 percent from the record-breaking previous year, according to Private Debt Investor data. But that figure has fallen dramatically, with just $1.6 billion raised by five funds in the first six months of 2023, the lowest first half number for more than a decade.

Vincent Ng, a Hong Kong-based partner with global placement agent Atlantic-Pacific Capital, says: “The overall fundraising environment out of Asia is comparatively more challenged today than in previous years. Last year saw record numbers flowing out from 2021 and early 2022, but in the last 12 months overall numbers have been lower as a result of a combination of factors, including high inflation, the denominator effect, volatile foreign exchange rates and geopolitical issues, all of which have had a big impact across alternatives.”

Ng says Asian private credit had been gathering pace but global macroeconomic movements have shifted the appeal for investors from outside the region. “At one stage, we were seeing an increasing number of new entrants coming into the Asian private credit market, and there were green shoots across senior secured lending, mezzanine and in special situations.

“More seasoned investors were starting to look beyond pure alpha from Asian venture capital, growth and buyouts, and were exploring potential ways to generate yield and stable returns with a little less risk.”

Ng adds, however, that the growth of the Asian private credit markets must contend with international investors that “feel they can obtain the same level of private credit returns from the US and developed European markets without having to expose themselves to the FX volatilities, legal uncertainties and geopolitical risks associated with investing in Asia. [Once those risks are factored in] the attractiveness of the offering is a lot less apparent.

“Looking forward, it is likely that the GP offerings in the credit space in the Asian region will remain dominated by the larger platform extension funds providing opportunistic credit as the primary offering.”

Geographical diversity

The largest fundraisings in the first half of this year included China’s DCL Investments raising $580 million for its fourth special situations fund targeting distressed assets in China, and Muzinich & Co’s $500 million final close in July for its first dedicated Asia-Pacific credit fund.

Muzinich’s team is spread across key hubs in Singapore, Hong Kong and Australia, which it said will enable it to tap into local networks to source deals. George Muzinich, founder and executive chairman, told PDI in July: “Private debt is well established in the US and Europe, while in Asia it has the potential for exponential growth in a market that is less crowded than its US and European counterparts.”

Shane Forster, head of Barings’ Asia-Pacific private finance group, says the more mature markets in the region continue to attract capital from European and North American LPs: “We are still actively talking to a number of potential investors and there is undoubtedly a lot of interest in the more stable, mature and developed markets in this region, with Australia being one that we focus on that sees a lot of interest, certainly. There is more of a pullback when it comes to the developing markets in the region.

“Increasingly, we see LPs from Europe and the US with considerable exposure into private debt in those markets that are now looking for some geographical diversification. We aim to deliver a similar risk profile with a focus on Australia, New Zealand, Hong Kong and Singapore, with arguably slightly higher risk-adjusted returns.”

Jeffrey Griffiths, co-head of global private credit at placement agent Campbell Lutyens, says there is a need to differentiate between markets in a highly diversified region. “The Asia region is a lot of different countries with very different economies and credit regimes, and there aren’t really any credit funds investing pan-Asia. They tend to focus on particular regions or countries. The big missing piece is China, which doesn’t really have an investable credit market for foreign investors. The government has kept the equity markets relatively open but the credit markets remain largely closed, giving credit investors limited options.”

Currency challenge

In the absence of China, the other economy that draws LPs is India, where there has been the most development of products that look like private debt in Western markets, says Griffiths. “A private direct lending market is starting to emerge in India, doing deals away from the banks, and we also see special situations and distressed credit funds focused on working out loans.

“The challenge in India has been primarily one of currency – the currency is volatile versus the dollar and, in a strategy like private credit where you are locking your capital up for five to seven years, it can be very difficult to predict where the currency will be. That makes it difficult for investors to go into India.”

There are some managers investing into Southeast Asia with typical equity replacement strategies, he says, where companies are either not willing to dilute their equity or banks are not willing to lend and so private debt is stepping in. But the culture in Asia has generally been one of low indebtedness, and there are challenges with the legal regimes in Southeast Asia.

Griffiths says: “Overall, Asia-Pacific is not a big market for US and European LPs. The larger and more sophisticated pension funds and sovereign wealth funds out of the US and parts of the Middle East have historically contributed capital to Asian strategies, but we don’t see much broader interest, and I suspect Asia will suffer more from the broader market slowdown in fundraising because it is typically a marginal addition to a portfolio rather than a core holding.”

European interest

Allianz Global Investors held a first close last year for its Asia-Pacific private credit fund, at that point securing €450 million of its €650 million target to invest in senior secured, senior unsecured, second lien and subordinated debt in the region.

Sumit Bhandari, lead portfolio manager in Asian private credit at Allianz GI, says: “We’ve had strong interest from European LPs but also increasing interest from Asia. That’s coming from the fact that Asia has been relatively unscathed from a macroeconomic perspective from aggressive interest rate hikes and there are still countries growing at decent rates across the region. Whether that is India, Indonesia or elsewhere, people see the growth stories now and see the attraction of diversification in their private credit portfolios.

“In the past, Asia has been bucketed by investors in with other emerging markets and it has been a high growth story. This time around, the local rates compared to the US have compressed, so in a lot of cases these markets show resilience, good fundamentals, lower inflation and levels of debt that are lower than in the West. The benefit of Asia not only as a high return market, but also as a true diversification play, has come to the fore.”

Of the $1.6 billion raised in the first half of 2023, 41 percent was for senior debt strategies, 37 percent for distressed and the remaining 22 percent was earmarked for subordinated and mezzanine debt.

Positive return

Eddie Ong, deputy CIO and head of private investments at Singapore-based SeaTown Holdings, part of Temasek, says: “The only asset class that in some way generated a positive return last year was private credit, especially among developed markets. That created investor demand and led to record fundraising for private debt not just in Asia but globally.

“In Asia, that increase was more pronounced because always Asia starts from a lower base. Asia private credit is only 6 percent of developed markets private credit, and yet the region accounts for 41 percent of global GDP. That disparity points towards the shape of things to come and is why we see tremendous momentum.”

Local investors take an interest

A busy commercial street in AsiaAsia-based LPs, from Japan and Korea in particular, are paying closer attention to private credit

Ong notes that many Asian LPs are beginning to assess the option of having a separate allocation for private credit, on top of their bucket for private equity. “They need some time to establish those programmes, but that is definitely happening and suggests they are going to be serious about allocations to the asset class.”

One source of capital for private credit managers that is expanding is from Asian LPs – with signs of growing appetite for the asset class among regional investors. This is benefiting both APAC GPs and fund managers from farther afield. “Private credit historically raises a lot of money out of Asia, particularly from Korea and Japan, but in a new high interest rate environment that scenario has slightly changed,” says Atlantic-Pacific Capital’s Vincent Ng.

“Still, a number of large managers have set up investor relations teams across Asia to capture that capital, and one would hope that as we reach a peak in interest rate hikes and the FX rates stabilise, those investors will continue to deploy. Asia remains a reasonable hunting ground for global credit managers.”