Aletheia makes case for venture debt in emerging markets
Venture debt is at the heart of private debt opportunities in the near future in east Asia, and in the world’s emerging markets more generally, according to Hong Kong-based investment advisor Aletheia.

Aletheia (a name taken from an ancient Greek term for truth, or disclosure) has posted a Private Credit Sector Report. Aletheia lists several of the main players in venture debt in  emerging markets, including Genesis Alternative Ventures, of Singapore, which launched Genesis Alternative Ventures II, with a focus on east and southeast Asia, last year.

As a case study in the potential of venture debt in Asian markets, the paper cites PayTM, (its name an acronym for “pay through mobile”) a company that it says is now “one of the largest fintech companies in the world”.

PayTM is an India-based digital payments company founded in 2010. It showed initial promise but by 2016, had stagnated. It addressed its difficulties with the aid of an infusion of $30 million in venture debt.

At the time of that infusion, PayTM’s valuation was $4.8 billion. With the money received, it hired new employees and expanded its research and development.

PayTM held its initial public offering in November 2021, raising $2.2 billion for 11 percent of its equity: in other words, at a valuation of $20 billion. The difference between $4.8 billion and $20 billion is a measure of the potential of private debt in general and venture debt in particular.

PayTM could increase its 2016 value by more than four times in five years because venture debt allows the managers of a firm to receive vital new capital without diluting the managing group’s ownership and control, and without the costs of a full equity raise.

Survey indicates fundraising revival
Existing concerns about the fundraising environment were further fuelled by this year’s first-quarter figures, which showed fundraising down across the alternative assets universe. While the decline in private debt was not as steep as elsewhere, it was nonetheless the least fruitful first quarter for many years. But, if a new survey from fund administration specialist Ocorian proves well-founded, the downturn should only be a brief blip.

The firm’s survey of alternative fund managers found 81 percent predicting that fundraising levels would be higher over the next 18 months than the last 18, with 69 percent expecting a slightly higher level and 12 percent dramatically higher. Only 1 percent tipped the level to be lower, while 18 percent thought it would be about the same.

An almost unanimous number (98 percent) said they were confident in the ability of alternative fund managers to successfully launch new funds over the next 18 months, with 52 percent very confident and 46 percent quite confident. Another overwhelming number – 91 percent – thought there would be more alternative asset fund launches this year than last year.

Asked to predict which asset classes would benefit the most from fundraising over the next 18 months (more than one could be picked), 73 percent said private equity, followed by infrastructure (68 percent), real estate (65 percent), private debt (59 percent) and hedge funds (49 percent).

Pensions’ long-term switch to private alternatives
Continuing the fundraising theme but considering longer timeframes, research from investment and advisory firm Cliffwater reveals the remarkable growth of pensions’ illiquid private asset allocations in recent years.

It finds that the $3 trillion US state pension market has increased its exposure to alternatives by 10 percent over the last five years to account for 41 percent of total state pension assets by the end of June last year.

But it also reveals the starkly different fortunes of private and public markets with the likes of private equity, real estate, real assets and private debt rising by 11 percent over a five-year period, while liquid alternatives such as hedge funds, commodities and managed futures declined by 1 percent.

This is none too surprising when performance is considered. According to Cliffwater, state pensions saw private alternatives deliver 11.9 percent in the 10 years ending June last year, while public markets delivered 6.8 percent and liquid alternatives 2.7 percent.

“Even if liquid alternatives reduce short-term risk, the give-up in long-term return may be too high a price for institutions,” Cliffwater notes.

It goes on to add: “The emergence of private debt within institutional portfolios, while still at modest 3.6 percent allocation levels, has perhaps the greatest potential for growth because of its high and persistent yields and lack of interest rate risk.”

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