Funding corporate growth

While the post global financial crisis environment has heightened awareness of this type of financing, the reality is that short-term private lending has been in Asia for a long time. Business dynamics in Asia ensure that private lending, although a small part of the Asian financing spectrum, will continue to be important.

Asian companies, particularly in Japan, Korea and China, have turned to private lenders to obtain short and medium term liquidity in order to take advantage of expanding commercial opportunities and to fund strategic projects.  Private lending has been a catalyst for growth and development during the entirety of Asia’s commercial history.

In the past, demand for private lending was driven partly by the lack of a formalised financial system. Historically, banks did not have the appetite or capability to lend to all companies in need of relatively immediate borrowing. As a result of this market void, alternative lenders have taken the opportunity to enter this space in various structures.

Today, the same dynamic holds true for different reasons.  Private lending is in high demand across Asia, as traditional sources of financing – including commercial banks – are not able to meet the demand for all borrowing needs. The key factor driving loan demand in Asia is its very strong basic economic growth. Growth in exports, foreign investment and domestic consumption all create needs for non-traditional borrowing. Companies today need capital as they seek either to grow organically or expand through vertical or horizontal integration.

Today, borrowers in Asia use private lending as bridge financing, primarily. These borrowers seek a short or medium-term solution for financing before traditional commercial borrowing is available. The predominance of privately controlled, family-owned companies in Asia also underpins private lending, given that many companies are cautious about information leakage during sensitive transactions. 

Although there is loan demand, the supply of traditional lending is constrained today by a few factors. The financial crisis has prompted some non-Asian banks to retreat from the market. Many European and US lenders that have previously been a reliable source of funding to large and mid-sized Asian corporates are no longer lending.  Additionally, banks have become further constrained by Basel III guidelines and new country-specific regulations that require greater levels of bank capitalization and other restrictions on previously accepted lending practices.

The slowing global economy and possibility of upward trending interest rates mean borrowing will become more difficult and expensive to obtain from international banks.

In addition to reduced lending from international sources, many domestic lenders are taking longer to approve loans.  This is true across East Asia.  For different reasons, bank lending in China, Indonesia, the Philippines and Thailand is taking longer. This is also generally true for other Asian countries. The combination of tighter domestic regulation and memories of non-performing loans in the wake of the Asian financial crisis in 1997 has resulted in added constraints on domestic lending in these countries.

This has created a higher demand for short-term borrowing across Asia. Hedge funds and private equity firms are among the groups with an increasing interest in this investment space due to the potential of high returns. 

The key challenge for any organisation lending in an environment of high loan demand is to reduce the risk of default through the selection of suitable borrowers. For new entrants to the private lending space there is a learning curve to ascend.  Strong business relationships and personal networks are extremely important. Additionally, lenders need to ensure that they have legal expertise and knowledge of tax issues in each country. Also, industry-specific knowledge and personal networks are critical.

Other implementation details are important. Enforceability of collateral, which can be subjective in many markets, is important. Lending and collecting debt may require patience and persistence when navigating domestic legal and regulatory systems.

Private lending in Asia will continue to be supported by the clear fundamentals of economic growth and reduced bank liquidity. But it may still continue to be a specialty segment of the market.

Warren Allderige is managing director and chief executive of Pacific Harbor Group. He is based in Hong Kong