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What are you currently observing in terms of growth trends in Asia for the next 12 months?
Asia has seen growth over the last five years – if you look at the number of investors investing into private credit funds, that has risen from 115 to closer to 450 in that period. The percentage of the global private credit market that is focused on Asia has gone from 6.2 percent to 7 percent.
The covid-19 situation has accelerated those trends. Asia is a booming market with a lot of SMEs and owner-managed businesses looking for alternative means of funding. In the past, they have been put off the private equity route because they were worried about being diluted and losing control of the business, so debt was attractive. Now, banks that might have stepped in previously are stepping away from lending, so there is a gap for private credit to step into.
Asia has performed fairly well through the pandemic – economies have pushed through and governments have done a good job of stabilising covid-19, so there is potentially less risk in these markets than in some of the other global economies.
Asia holds a third of global GDP but only 7 percent of the private debt market. Debt managers have looked at Asia as opportunistic in the past, but now it is looking like a more solid part of the portfolio.
What is happening on the fundraising front in the region? What does investor appetite look like for debt funds, and where is capital coming from?
There has been a bit of wait-and-see. There are funds either launching or in the process of launching that have been delayed, not postponed indefinitely, in debt just as in other asset classes. There is hesitation on the part of investors to part with money when there is so much uncertainty, and that is partly to do with due diligence logistics, where there are challenges around elements like face-to-face meetings.
But we are starting to see the market ramp up and there has been a bit more activity in the last couple of months. The larger institutional managers will be increasing fundraising into 2021 and we also see smaller funds starting to become more active as we move towards the end of this year.
Traditionally, around 70 percent of fundraising by Asia managers comes from outside the region, with around a third of that from the US. That will probably remain the case, perhaps with an increased contribution from high net worth Asian investors and family offices who are starting to come into the asset class. There is certainly appetite. The Asian economies have done reasonably well but there is also clearly an opportunity in the distressed debt space around non-performing loans.
Where are those debt funds finding opportunities to deploy capital?
You cannot look at Asia as a homogenous region because there are lots of differences both culturally and economically between jurisdictions. The tiger economies of Asia, plus Vietnam, Malaysia and Thailand, have plenty of opportunities both on the distressed debt side and in lending to SMEs. There are lots of small businesses with potential who are averse to bringing in private equity. In the larger, more mature economies like South Korea and Japan there are sizeable infrastructure and real estate projects that offer an opportunity for debt funds to replace bank lending. The opportunity is different in different countries, but infrastructure will become much more interesting in Asia when you consider the Belt and Road Initiative, the maturity of the economies and the fact that banks and national governments are not necessarily going to fund those investments.
What trends are you seeing in terms of popular structures?
Singapore and Hong Kong remain the hubs for management entities. In Singapore, we are seeing more and more managers setting up to take advantage of various tax incentives on offer. They need to be sure they get proper tax advice because there are different considerations around the different types of income that funds receive.
“Banks that might have stepped in previously are stepping away from lending”
In terms of structures, we continue to see Cayman vehicles being used with Singapore corporates as holding companies. We have obviously got the Singapore variable capital company (VCC) structure, which at least one large credit manager has used. That is not something that has taken off particularly for private debt vehicles – it has been successful but has tended to be used by family offices with multiple structures or single investors, not large institutional managers, however, we expect this to change in 2021 and beyond.
Cayman structures will continue to be popular but with these new onshore structures starting to come online, there is more choice. The limited partnership regime in Hong Kong, which launched a month ago, is another example where it is too early to see how it will go.
Cayman was blacklisted by the European Union until last month, and to address concerns they have increased regulation of private funds and introduced substance laws that have caused it to be more expensive. Still, Cayman benefits from good investor familiarity and is tried and tested as a jurisdiction for investment structures. The onshore options have a lot of potential and will likely be picked up by smaller managers; larger managers may take a bit longer.
Finally, what opportunities are there in India and how are funds accessing that market from Asia?
When it comes to India, there is a lot of opportunity in the infrastructure space. We know a number of large infrastructure managers that are already investing there, whether through debt or private equity. Obviously, it’s a huge market and the interesting thing in terms of structuring is that traditionally it was Mauritius structures that were used, but now those funds are increasingly going through Singapore.
When we are talking to India managers, they do tend to mention the VCC more than any other structure and setting up a presence in Singapore for their management company, which they are required to do for the VCC. We are definitely seeing a shift to Singapore. There are no real tax benefits for using a Maurituan structure over a Singapore structure. It is often easier to attract investors if you are a regulated fund in Singapore.
What challenges and opportunities are new distressed managers seeing in the region?
Clients are telling us that it is important to have people on the ground in the jurisdictions where they are lending and where the end borrowers are, so you can have oversight of what is going on in those countries and really understand how those businesses are operating. We are seeing Philippines, Indonesia and Thailand among the new areas where distressed debt funds are looking, particularly at hospitality and prime real estate assets.
The challenge comes in understanding the different cultures and working with those borrowers, or the lenders that you are acquiring debt from, to really understand what is happening on the ground, even if you do that through a local partner.