Barings was an early mover in private debt in Asia-Pacific, identifying an opportunity a decade ago to build on its capabilities in Europe and North America and capitalise on a growing number of mid-market private debt deals in Asia.
Shane Forster, head of Barings’ Asia-Pacific Private Finance Group, told PDI in November that his team had deployed around $1 billion in the region during the past 12 months alone, roughly five times what they were doing five years previously. With new entrants coming in, borrowers have started to focus on private debt as a real financing option, he says. “Meanwhile, the pressure on banks’ cost of capital has caused them to retreat, and much of the expertise from that industry has migrated to private credit,” says Forster.
Partners Group is another lender that sees the mid-market at the core of a growing private debt opportunity in the Asia market. Abhishek Dhayal, a member of management in the firm’s private debt Americas team, says: “Similar to the US and Europe, the presence of direct lending continues to gain importance in Asia-Pacific too. Historically, the markets relied on bank financing but we see a large financing gap, especially for small to mid-sized companies.”
With US and European sponsors ramping up their teams in APAC markets, such as Japan, Korea, Hong Kong, Singapore, Australia and New Zealand, direct lenders with global presence have been able to back sponsors they know well as they move across borders. They have also migrated structures into APAC from elsewhere, as was the case with the first unitranche Partners Group pioneered in the region in 2017.
“Still, the documentation and the overall structure of these deals tends to be more conservative in Asian markets,” says Dhayal. “Unitranche deals typically have covenants, tighter headrooms and better core protections that benefit lenders.”
Eddie Ong, deputy chief investment officer at Singapore-based SeaTown Holdings, agrees: “Asian private credit has a superior value proposition over developed market credits because of its scope to use proprietary credit structures versus standardised off-the-shelf structures.
“Private credit structures in Asia are generally better collateralised and employ far less leverage versus developed market credits. In this high-interest rate environment, its risk is much lower.”
At a time when LPs have had to adjust to the realities of a lower equity return environment, he adds: “We believe Asian private credit delivering low- to mid-teens net return stands out as a compelling risk-adjusted asset class.”
In Australia, credit funds see growing interest from investors outside the region. Andrew Lockhart, managing partner at one of the dominant private debt players in Australia, Metrics Credit Partners, says: “Australia is a unique market because it is so bank-dominated, with limited alternatives to the four major domestic banks. That is actually a very good market for a private debt investor, with lower risk because deal structures tend to be more bank-like, and premium pricing in comparison to offshore markets because access to funding is limited.”
Lockhart says his firm can negotiate loans directly with borrowers, structure the terms and conditions and set the price. Lenders can also mitigate risk through covenants and controls: “We are starting to see more offshore investors coming in and considering an allocation to private debt in the Australian market. Previously, investors may have said they wanted an Asian exposure and that tended to mean China or developed parts of Asia. But the returns you can generate in those markets are quite different to the returns in Australia, which we believe can be premium to elsewhere.”
Ryan Chung, head of structured finance and principal investment at Huatai International, predicts good things for mid-market private credit in Asia: “Corporates are getting more sophisticated and constantly seeking out alternative channels to raise growth capital without equity dilution,” he says.
“Private equity sponsors are adopting more complex capital structures, including structured credit, to enhance their return. And with Asian economies and markets still growing, ensuring robust demand for capital support, this all together ensures healthy demand for private credit going forward.”
South Korea calling
Soomin Kim, a partner with UCK Partners, explained to affiliate title Private Equity International in February that the mid-cap segment is now driving opportunities in South Korea.
“By and large, the Korean private equity landscape was dominated by large-cap and small-cap transactions, so the mid-cap segment has been white space for some time,” he says. “Today, the Korean mid-market buyout space is highly attractive for four reasons. First, the segment is deep and consistent in terms of dealflow because the Korean economy is driven by mid-cap companies. There is a generational shift coming as many entrepreneurs and founders are ageing, which is creating opportunities.
“Second, there tends to be more upside and valuation arbitrage in mid-cap buyout transactions than in large-caps, as there are typically no intermediaries involved and deals can be struck privately. Management structures at many of these businesses need upgrading, which presents significant value creation opportunities post-acquisition. Third, exit options are good in the segment as mid-cap companies typically remain at a size where they are attractive for both financial and strategic buyers. And finally, the mid-cap market is less competitive despite its attractive aspects.”
Barings’ Forster says APAC private debt offers an attractive return premium versus more developed markets in Europe and North America. “We are generating a similar return but arguably with a better risk profile, given the larger companies we lend to. Given that there isn’t really a developed capital markets here, companies look for private debt solutions even as they grow into the $100 million-plus EBITDA range.”
Asia-Pacific is certainly not immune to the macroeconomic and geopolitical challenges hitting the world economy, but as a higher growth part of the world with stronger demographics, positive tailwinds suggest a boon for mid-market private credit going forward.