Loan Note: The rise of direct lending in APAC; Nomura launches new fund

We report on some of the key observations from last week's APAC Forum, including the rise of direct lending. Plus: a new fund launch from Nomura and why private funds need to be careful about sanctions. Here's today's brief for our valued subscribers only. 

They said it

“Globally, the high inflation scenario deepens the construction downturn expected this year and cuts the growth rate of global construction activity nearly to zero”

Taken from the latest Oxford Economics research briefing, Persistent inflation could blow hole in construction markets 

First look

New dawn in Singapore: growing hub for private funds (Source: Getty)

Last week saw the Fairmont Singapore play host to our 2023 APAC Forum, with a record number of delegates keen to discuss the growth of private debt in the region. It was a lively, fascinating and well received two days. The sessions included a keynote from Cheng Khai Lim of the Monetary Authority of Singapore on the city-state’s efforts to attract private fund managers and a panel on opportunities in the region’s emerging markets.

Here’s a flavour of some of the other talking points:

Direct lending rules the roost
Figures presented by PDI showed that, as recently as 2018, 49 percent of fundraising for Asia-Pacific was focused on distressed strategies with senior debt accounting for just 18 percent.

The region had been much slower to see the kind of banking regulation that handed a bigger slice of corporate mid-market lending to private funds in North America and Europe. But last year showed how much the strategic landscape has been transformed since then, with a near reversal of fortunes – senior debt accounting for 55 percent of the total and distressed 20 percent.

There was a view that some investors have ended up disillusioned with a distressed market that has not delivered as much as hoped, with direct lending income-generation preferable to the slow progression up the j-curve associated with distressed strategies as they eat up fees. There is also caution around legal frameworks that lag behind those in the West and may not give enough protection to creditors.

Pressure building but sunny outlook for new deals
“Interest rates will start to have an impact on borrowers over the next couple of quarters,” said Adam Wheeler, co-head of global private finance at Barings. But despite economic pressures, his sense was that existing portfolios had held up better than might have been expected. The new deal environment, he said, was “extremely positive” with large equity cushions, tighter cashflow cover and less leverage.

Randy Schwimmer, co-head of senior lending at Churchill Asset Management, said that amid the liquidity crunch “companies have to go to private markets, as they have nowhere else to go”.

The Asia-Pacific region appears to have taken less of a hit from macroeconomic turbulence than North America and Europe. Ani Deshmukh, managing director for Asia Credit at Ontario Municipal Employees Retirement System, said: “Asia has had a lot of same macro issues but at a lower amplitude. Rates have not gone up as much, inflation has been less than people expected. Liquidity is pretty good, tightening over the last quarter or so but there are no real signs of stress.”

Three-quarters predict tougher fundraising
A live audience poll revealed that 76 percent expected the fundraising environment to get tougher over the next 12 months compared with the last 12. Only 10 percent thought it would get easier, while 14 percent felt it wouldn’t change much.

Gary Hui, senior vice-president and head of the Hong Kong office at Wilshire Associates, said he broadly agreed with that sentiment although things may not change much for blue-chip managers with long track records – investors want big names not new managers, he added.

Maiko Nanao, a managing director in investment research at Aksia Asia, agreed that the fundraising environment was tough but still thought the findings were “quite surprising as Asian GPs were generally quite optimistic and confident”.

Perhaps most upbeat was Jingjing Bai, a senior adviser at Bfinance, who said she thought the worst of the denominator effect might be over. “Private credit is seen as one of the safest asset classes and some allocators are restarting their efforts. We have clients who want seasoned managers that have been through cycles and understand covenants and workouts. For established managers, the next year could be easier. “

China: Don’t expect too much
In a presentation focused on China, Clarence Wong, chief economist of Hong Kong-based Peak Reinsurance, pondered whether China – as it did after the global financial crisis – would once again ride to the rescue of the global economy. The verdict appeared to be – don’t hold your breath.

While savings in the country increased during the pandemic, this has not translated into a recovery in consumer spending. Services consumption has increased, but goods consumption remains at a stilted level while youth unemployment is stuck near 20 percent. Manufacturing activity is also slow.

From 3 percent last year, the government is predicting growth of 5 percent for 2023 – still below recent historic averages. “With population decline this year and tax rates high, there are a lot of challenges facing China,” said Wong. He said the country would “muddle through” current difficulties but don’t expect it to deliver a rocket boost to regional growth – never mind global growth.

Managers gravitate to the southeast
Talk was of increasing dealflow in the region in general but especially in Southeast Asia. As China has become a more difficult market to transact (see above), in part due to the strict covid lockdowns from which it’s only just emerging, some managers have seen Southeast Asian markets such as Vietnam and Indonesia as viable alternative options.

The fact that most deals are in the non-sponsored market is seen as a good thing given that in such deals private debt is typically in competition with banks. The increase in base rates has reduced the price differential between banks and private debt funds.


Nomura Private Capital launches inaugural fund
Japanese financial giant Nomura is pushing into private markets, through Nomura Private Capital. NPC has launched a debt fund, the Nomura Alternative Income Fund, which is seeded by Nomura Holdings with an initial $100 million.

A spokesperson last week said: “NAIFX is now live, and the team has begun to engage actively with its current and future partners,” such as RIAs, bank and trust departments, and family offices.

Nomura appointed Robert Stark the chief executive officer of NPC, as well as head of investment management in the Americas, in April 2022. In a statement announcing the launch of NAIFX, Stark said: “Based on client demand and feedback, the team worked relentlessly over the last year to get this fund off the ground. We aspire to become a partner of choice to our clients in supporting the shift from public to private markets and are excited about the opportunities for our clients and for Nomura.”

Matthew Pallai, chief investment officer of NPC, leads the investment team.

In an email, NPC described NAIFX’s strategy as one of strategic diversification across a range of private credit markets: “real estate, asset based lending, speciality finance and corporate lending/direct lending.”

An NPC spokesperson declined to comment on either a target or hard-cap.

Sanctions in the spotlight
Private credit funds need to get their house in order on sanctions, according to a Trends in Private Credit and Special Situations report from law firm Akin Gump.

With sanctions in the spotlight following the outbreak of war in Ukraine, the report says sanctions in debt agreements “have long been overlooked and are often treated as ‘boiler plate’ and are therefore frequently outdated and deficient in their ability to protect lenders in the face of rapidly evolving sanctions and enforcement risk”.

In the US and some other jurisdictions, lenders may find themselves on the hook for unlawful borrower activities even if they knew nothing about them and the activities were not material to the business’s activities.

“The current sanctions environment warrants a heightened level of due diligence on borrowers that simply would not have been needed five years ago,” the report warns.

The report also predicts growing areas of activity for lenders, including liability management transactions, growth capital to emerging companies and the global energy transition.

The complexities of non-sponsored
Our newly published April cover story focuses on the rise in interest in non-sponsored lending. A report by law firm Ropes & Gray makes the point that non-sponsored lending is not only very different from sponsored lending but also has a complexity that puts it into the domain of the performing special situations and hybrid capital markets.

Ropes & Gray’s special situations partner Samuel Norris has compiled a handy list of the differences in non-sponsored lending including governance issues relating to owner-managers and the possible need to insert a new holding company due to multiple shareholders owning shares directly in the operating business.

LP watch

Institution: New York State Common Retirement Fund
Headquarters: Albany, US
AUM: $242.3 billion

New York State Common Retirement Fund (NYSCRF) has committed $15 million to Raith Real Estate Fund III, which is managed by Raith Capital Partners.

Founded in 2012, Raith Capital Partners is a New York-based asset management firm focused on distressed loans and commercial mortgage-backed securities across the US.

Raith Capital Partners’ third flagship distressed fund seeks to acquire mainly North American businesses. NYSCRF’s recent private debt commitments have been focused on North American vehicles with various strategies.

Today’s letter was prepared by Andy Thomson with John Bakie, Christopher Faille and Robin Blumenthal contributing.