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.

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