Asia: Investors seek illiquidity premium

Private debt investors are spotting opportunities in Asia-Pacific where distressed and mezzanine strategies are dominant.

More capital is flowing into private credit as investors seek income with record amounts of uninvested capital accumulating in private equity.

Private debt fundraising for the first three quarters of the year reached $130.7 billion globally, surpassing all previous full-year amounts, according to PDI’s Q3 2017 Fundraising Report.

Asia-Pacific-focused private debt funds had raised $3.6 billion or 2.8 percent of the total fundraising figure at the end of Q3, the data shows.

The region’s private debt funds take only a small proportion of the total fundraising amount, but the Asian private credit market is gaining traction as investors seek an illiquidity premium.

Many entrepreneurs and promoters are loath to sell equity in their businesses, according to KKR’s Global Macro Trends report published in October.

KKR explains that these entrepreneurs prefer to issue debt they can pay down in a three-to-five year period. Therefore, private debt is seen as the most efficient and valuation-sensitive way to invest in high quality, private entrepreneurial companies.

Among investors looking for allocations to private debt, mezzanine, subordinated and distressed strategies are the most in demand globally, accounting for 62 percent of total allocations to private debt, according to the data.

Although senior debt strategies are the fastest growing sub-segment in fundraising terms, distressed and mezzanine strategies are still dominant in the Asia-Pacific region, according to Juan Delgado-Moreira, managing director of Hamilton Lane (Hong Kong), which invests across Asia on an opportunistic basis.

“Private credit investors in the region are more interested in mezzanine and opportunistic strategies given the risk-return profile in Asia-Pacific,” Charles Wan, principal at placement agent Atlantic Pacific told PDI.

Delgado-Moreira told industry participants at a Credit Market Outlook session for the Milken Institute 2017 Asia Summit in Singapore in September that “direct lending and senior debt pieces are relatively newer arrivals and they are fast growing ones in terms of the percentage of fundraising”.

“We have seen direct mid-market lenders following clients’ needs in private credit,” he added, noting that there are increased expectations in some sub-segments of credit, such as Chinese non-performing loans.

Oaktree Capital’s chief executive officer, Jay Wintrob, said during the firm’s earnings call on October 26 that it has been busy examining real estate-related opportunities in Asia including Chinese non-performing loan portfolios.

Among managers new to private debt in Asia, BlackRock launched its opportunistic fund in April targeting $500 million, as per previous reports by PDI. Bain Capital also held a first closing on its special situations fund on $557.9 million in September.

Legal structures for debt restructuring have evolved in certain countries, which provides investors with better downside protection and helps the fundraising environment.

Singapore recently updated and amended debt restructuring rights, aiming at achieving an efficient and clear legal framework for cross-border restructuring and insolvency cases, according to a statement published by the Ministry of Law of Government of Singapore on May 22, 2017.

In India, the Insolvency and Bankruptcy Code 2016 enables creditors or the company itself to initiate an insolvency resolution process, according to the Ministry of Corporate Affairs of India.