What is the opportunity as you see it in the US’s private credit market?
VN: The US is still the deepest and broadest market across all asset classes relative to Europe and Asia. The credit industry is broken down into different segments, from the higher end of senior secured lending to the more junior mezzanine or unitranche investments. Within that space, there are a number of fund managers investing across the spectrum. So whenever investors are looking at the global credit market, they usually start with the US and most of them have their largest portfolio allocated to that particular market. Overall the US has most to offer, particularly in the last few years where credit has become more important to LPs’ portfolios in a low-yield environment.
What is the most popular debt strategy for Asian investors in the US?
VN: From the perspective of Asian investors, senior secured in the direct lending space with a modest single-digit return is usually where they will focus first. Whether it is from an asset liability standpoint or a portfolio management standpoint, lower risk with current coupon income would make much more sense to them because most of these investors are looking for safer allocation alternatives with a cash yield. However, for some Asian investors which have already established a toehold in the space, they will start moving further down the structure into the more junior or mezzanine tranches. This is what they will do when they are developing their credit portfolio.
How would you compare allocations into distressed and direct lending in the US?
VN: My guess would be that direct lending takes up a large chunk of investment, but in the past 24 months investors are actively looking at distressed and special situations as well. But if you are comparing it from the fundraising perspective and number of investors, direct lending is still dominating the private credit space. The reason for the rise of special sits comes with the higher return within the debt spectrum.
Which sector do Asian LPs prefer in the US?
VN: Most LPs are looking for a more generalist approach because they haven’t evolved enough to have sufficient exposure to the broader US credit market. But even for generalists, there are certain sectors that they are more familiar with so, by nature, you still get some sector skew – for example, consumer and manufacturing are more popular while IT/tech features less. Venture debt is not as widely used as traditional economy approaches at this stage.
How would you compare the US and European markets?
VN: Generally speaking, both markets feature highly. Europe has traditionally raised some money from Asian investors because it sits at the safer end and higher up on the debt structure. On the other hand, the US comes up more often for groups looking at mezzanine investment. Most of the mezzanine players that one comes across in Europe are sponsored mezzanine and less non-sponsored. As a result, the number of players within the market makes it very competitive to enter and a high return is not easy to come by. For LPs willing to take a bit more risk, the US market seems to offer a wider range of choices than Europe.
Who are the most active Asian investors investing in the US?
VN: This needs to take into account investors’ motivation. Usually investors entering the private credit space are longer-term investors which have asset-matching liabilities and need to find stable income. Therefore, they are looking to juice up their income in the current low-yield environment. Koreans are extremely active with lots of RFPs coming along. The Japanese, Taiwanese and Australian markets are also quite proactive.
Vincent Ng is a partner responsible for the Asia Pacific region at Atlantic-Pacific Capital, the global placement agent and advisory firm