Heavyweights make room for Asia-Pacific debt

Private debt managers looking at opportunities in Asia reflect a wider theme of institutional investors looking for yield and diversification outside of their home markets.

A number of the larger US-based private debt managers are raising global funds and for the first time carving out specific allocations to invest in Asia-Pacific.

Among them is Babson Capital, whose managing director, Adam Wheeler, was among panellists at last month's PDI Asia Forum who told how risk-adjusted returns were better there than in Europe or the US.

This is a significant shift.

For most alternative investment managers, an Asia-Pacific strategy would be essential for it to be considered 'global'. But in private debt -a relatively nascent and developing asset class – many GPs that label themselves global only focus on the US and Europe, steering clear of difficulties around creditor rights in a number of Asian countries.

But the region is now creeping onto the radar of international debt fund managers. One market source estimates that some funds are planning to deploy up to 30 percent of their capital there.

Another fund manager seeing a lot of opportunity in Asia is KKR, currently raising capital for its second special situations fund . The firm has also been beefing up its team in Hong Kong.

Fellow heavyweights Sankaty and Blackstone also appear to be raising global funds with Asian allocations. Sankaty has invested in the more developed markets within Asia-Pacific, having bought GE Capital's leasing portfolio in Australia and recruited ex-JPMorgan special opportunities professional David Yu for its Hong Kong office last year.

Meanwhile, Blackstone has also made a key hire and is broadening the remit of its BREDS programme to include other geographies , while the Carlyle Group this month reached a first close on Carlyle Asia Structured Credit Opportunities Fund (CASCO), the first dedicated structured credit vehicle focused on the region. It has collected $235.6 million towards a $1 billion target and will invest in privately negotiated tranches of Asian structured financings backed by corporate and consumer loan receivables.

One of the biggest factors driving this shift is the slowdown in China. Others cite a continued pullback in lending in specific segments by banks. All say they are seeing more opportunities as a result.

The fundamental shift from highly levered and short-term money-backed bank balance sheet lending to liability-matched finance provided by institutional investors has not happened in Asia-Pacific at the same pace as the US or even Europe, where private debt providers have grown tremendously. But, as the heavyweight names move into the region suggest, there are reasons to be cautiously optimistic.

The market is small, but the opportunity is growing as recent market turmoil highlights dislocations not revealed in the immediate aftermath of the financial crisis.

It will not happen overnight but for firms with the scale, expertise and patience, a slow and measured approach will win out.