The Asia-Pacific private debt market has been constrained by the covid-19 pandemic, but has continued to mature, with new entrants, new funds and a race for talent in a still-nascent market.

Private Debt Investor fundraising data shows only five Asia-Pacific-focused funds closed in the first half of this year, raising a total of $1.04 billion. This compares with a total of $5.53 billion raised in the whole of 2020, down from an annual high of $10.76 billion. However, this does not cover global funds with an Asia-Pacific allocation. In addition, the largest five Asia-Pacific funds in market are seeking more than $6.5 billion in aggregate, including substantial funds such as PAG Loan Fund V, which is seeking $2.5 billion.

PDI data for the first half of 2021 shows a relative decrease in capital raised for senior debt and more for mezzanine and venture debt, as well as a sharp drop in the proportion of capital raised for corporate lending. However, this is likely to be a consequence of the relatively small number of new funds closed.

Nonetheless, the region’s private debt market has grown considerably in the past five years and looks set for further expansion. Richard Johnston, partner and regional head of Asia at investment adviser Albourne Partners, says: “The Asia-Pacific private debt market keeps growing; we are tracking 77 active funds, which have raised a total of $59 billion. Capital-raising has been strong, especially for established players, who are able to close larger and larger funds.

“The biggest investors in the asset class are Asian sovereigns and large North American pension funds, as well as some European and Asian funds. We also see Australian super funds investing in domestic private debt vehicles.”

Double-digit returns

Recent investors in Asia-Pacific private debt vehicles have been rewarded, says Johnston, with double-digit returns readily achievable outside Australia. Nitish Agarwal, chief executive officer and chief investment officer at Orion Capital Asia, says: “There will be private debt players with exposure to China real estate and sectors such as online education. However, broadly speaking, private debt in Asia-Pacific has performed well through the pandemic and it has demonstrated some of the benefits of the sector and its tighter security and covenant structure.”

Asia-Pacific private lending tends to involve fewer sponsored deals and more direct origination from family-controlled companies. The use of onshore and offshore collateral, as well as personal guarantees, is also far more of a feature than in North America and Europe.

One sign of the market maturing is an increase in new market entrants. Richard Tan, alternatives investment director at Mercer, says: “In the past few years, we have seen more activity from global and regional players entering Asia’s relatively nascent market for private debt. Activity levels appear to have increased recently as more players jostle for position to play a greater role amid the impact of the covid-19 pandemic.

“On a related note, there is an observable trend in the formation of teams in the region focused on private debt investing, for both managers and investors. The hunt for specialist private debt talent appears to have also intensified.”

Global investors have been getting involved with Asian private debt platforms. In September, HSBC and Singaporean sovereign Temasek launched a joint venture to provide debt to sustainable infrastructure projects. At the beginning of this year, Orion Capital Asia announced an equity investment from Canadian pension plan OMERS, while in April Affiliated Management Group announced an investment in OCP Asia.

Jay Horgen, president and chief executive officer of AMG, says: “Our partnership with OCP Asia is our second in the region and enhances AMG’s participation in private markets across Asia, where client allocations are continuing to grow. There is significant structural demand for credit from sophisticated borrowers in the region.”

Aussie margins low

The key markets for private debt investors in the region remain China, India and Australia. For some GPs, however, the margins offered in Australia are too low and they instead prefer Southeast Asia, where Singapore and Indonesia see the most activity.

Australia is the most developed private debt market in the region, but also the one with the tightest pricing. The big four banks have been retreating and seeking more vanilla lending for some time, which has led to global private lenders setting up shop and a number of smaller domestic players, often funded by Australian superannuation funds. As a consequence of tight pricing and strong covenants, the unitranche market is expected to develop in Australia, with leverage used at the fund level to boost returns.

India has attracted the attention of a number of global private debt players, due to a series of regulatory improvements. Reform of the bankruptcy code in 2016, followed by a series of updates, has created a much more creditor-friendly environment, allowing lenders to take control of a company if necessary and opening up distressed opportunities. At the same time, a series of crises among India’s non-bank financial companies has widened the funding gap.

Johnston says: “There is a big funding gap in India, due to the withdrawal of non-bank financial companies from the market. There are opportunities to lend secured against NBFCs’ loan portfolios or to buy performing loans from them. The changes in the Indian bankruptcy code have also made private credit more attractive.”

ESG factors have become more and more important in Asia-Pacific private debt, a trend accelerated by the pandemic and managers universally report more pressure from investors in this regard. So far, few ESG lending strategies have been launched, but more are expected.

Underpinning the Asia-Pacific private credit story is the growth expected in the region over the next decade. Since the global financial crisis, Asia has been the engine of global growth, driven by urbanisation and a rising middle class, trends that are set to continue and support further private credit investment.