The continuing spectre of covid-19 and concerns over China are inducing caution, but the secular move to greater investment in Asia-Pacific private debt keeps managers optimistic about the region’s prospects.
Private Debt Investor preliminary data shows funds with an Asia-Pacific-only debt strategy raised $8.4 billion in 2021. However, this does not include the Asia-Pacific allocation of global or multi-regional funds, which raised a further $51 billion. Nonetheless, Asia-Pacific is still a tiny market relative to North America, where $113 billion was raised in 2021, and Europe, where the amount raised was $67 billion.
Managers are positive about the fundraising outlook, expressing confidence that private debt allocations were rising for Asia-Pacific and that the long-term outlook for fundraising was positive. Private debt is benefitting from a global move by institutional investors towards more private and more alternative investments. According to the Global SWF report, sovereign wealth funds increased their allocation to alternatives from 15 percent in 2008 to 25 percent in 2021, while over the same period public pensions increased their alternatives allocations from 11 percent to 19 percent.
“There is more and more interest in Asia private credit, particularly from large institutions”
Michael Wang, managing partner and president of Abax Global Capital, says: “Overall, there is an increasing amount of capital being allocated for Asian private debt, as investors recognise that this is a defensive way to play Asia growth and to address market volatility. But fundraising favours those GPs with a track record and scale. Larger and more established firms can raise much more easily than smaller and start-up funds.”
In mid-2021, Ares SSG raised the largest ever pan-Asian secured lending fund, SLO III, with $1.6 billion of capital commitments. The fund was twice the size of its predecessor, which closed in 2017.
Roger Zhang, head of private debt APAC at Partners Group, says: “There is more and more interest in Asia private credit, particularly from large institutions looking to diversify their holdings or increase Asia exposure, which is often small relative to the region’s share of global GDP.”
Investor interest in the sector tends to concentrate on the more developed or mature Asian territories, such as Australia, Singapore and Hong Kong. Many investors are cautious on China, while the diverse legal landscapes of developing parts of Asia are a barrier to entry there. Wang says: “There are vibrant economies with a lot of opportunities in the longer term. However, they are not out of the woods in terms of covid, especially the frontier markets of Southeast Asia where the public healthcare system is weak and under pressure.”
GDP bounced back in most Asia-Pacific markets in 2021. However, Richard Tan, portfolio specialist for Asia at consulting firm Mercer, says that, although data for the latter part of 2021 is not available, dealflow is likely to have been subdued. Speaking in early 2022, he says: “An uptick in dealflow is unlikely unless there is a significant improvement in the global pandemic outlook.”
Nevertheless, both Wang and Zhang reported strong dealflow for their companies. Wang says: “Dealflow is very strong because the IPO market in Asia is pretty vibrant and the bankers I speak to suggest that will be the case this year too, plus the middle market in the region is still starved of capital. We are particularly bullish on the renewable energy and consumer sectors for the coming few years.”
Zhang adds that 2021 was “extremely busy for us across all our APAC markets. Business has stabilised after covid and private equity funds have a lot of dry powder for buyout activity”.
Relative returns look strong
Comprehensive data on Asia-Pacific private debt returns is hard to find, but the sector looks attractive compared with fixed income, which saw returns stray into negative territory (-0.9 percent) in 2021. Zhang says: “Very broadly, unlevered Asia private debt returns range from high single-digit for direct debt, through double digits for junior debt and high teens for distressed or special situations. We saw some tightening of yields worldwide in 2021 due to the liquidity in the market.”
The private debt market continues to develop in Asia-Pacific. Although direct senior lending remains the most common strategy for funds – accounting for more than half the APAC-only capital raised in 2021 – managers are broadening their horizons. As the most developed private credit market in the region, Australia tends to be the place where new ideas are tested.
Unitranche lending is set to become more important in the region, having been first seen in Australia. Zhang says: “We completed some of the first unitranche investments in the region. There may be some large Asian unitranches on the horizon, which will further drive market growth. We are also starting to see more term loan B issuance outside of Australia, which is creating a more comprehensive offering for borrowers in Asia.”
The coming year could see a return of lending to the sectors hit hardest by covid, says Mercer’s Tan. Sectors such as travel and leisure could present “interesting value propositions”, he says. “There appears to be significant pent-up demand that could fuel a recovery in these sectors in 2022 and beyond.”
Most Asia-Pacific-based private debt managers are looking to expand and tend to report strong competition for staff, especially for areas such as ESG. In response to global investors’ demands, managers are bolstering their internal teams with ESG capabilities.
As more global managers enter the space and organic growth becomes tougher, more M&A activity seems likely. Ares bought Hong Kong-based SSG in 2020 and other global firms are expected to make acquisitions of their own.
China eases to relieve real estate…
…But investors are still cautious about the sector, in addition to their regulatory concerns
Investors have become wary of China, due to the travails of its real estate sector and regulatory changes that have hit certain industries. Yet the market is still too big to entirely ignore.
The troubles of vastly indebted property developers such as Evergrande, which is restructuring after racking up liabilities of $300 billion, have encouraged caution with regard to China’s real estate market. However, Beijing has eased a number of policies, including the ‘three red lines’ for developer borrowings, in order to shore up the sector.
The regulatory environment has also become more uncertain. Technology companies have been hit by a wave of regulation, while the previously lucrative online tutoring sector has been regulated almost out of business.
Michael Wang, managing partner and president of Abax Global Capital, says: “There is definitely anxiety in the air with regard to China. When I attended SuperReturn and other conferences, talking to people in the investment community, the regulatory changes we have seen in the past year are still making people nervous.
“However, people also recognise that Asia is still the engine of global growth and China is the key part of that. The Chinese government has introduced measures to provide relief to the heavily hit real estate sector. Infrastructure spending is up. Some segments in consumer spending, like travel, have been hit, but the luxury goods are selling well and the restaurants in large cities always seem full.”
Richard Tan, portfolio specialist for Asia at consulting firm Mercer, says: “We expect investors to continue waiting for better clarity and visibility of the situation before making their next move.”