Debating debt: Concerns at PDI Asia Forum

Asia has long been the forgotten player of the private debt world. Last year, just $6.7 billion was raised in the region, compared with $99.7 billion elsewhere, according to PDI research. So for those gathered at this magazine’s Asia forum in Hong Kong last month, the question was, ‘When will the region’s time come?’

A new bankruptcy law in India and structural changes in China offer the glimmer of opportunity for braver investors, but to many looking to diversify into the region the risks are still too great.

“There are opportunities, but also risks, largely associated with the legal systems and government interference,” said Jake Williams, deputy group chief risk officer at Standard Chartered Bank Hong Kong. “If you don’t understand the individual markets … you can get badly burnt. Selectively there are good opportunities, if you know what you are doing.”

Mark Katz, director of alternative investments at Ontario Teachers’ Pension Plan, was equally guarded. “We are seeing some very positive structural reforms in China and India regarding the bankruptcy system and asset restructuring companies. But ultimately the ability to enforce on your loan and to get your money back remains a problem.”

From an LP perspective, there appears to be a sufficient supply of opportunities from a pan-Asian perspective, but drill down by country and asset and there are a lack of situations into which to diversify.
As Katz and Williams both warn, Asia can’t be painted with “one big brush”.

“Asia is not Asia, Asia is Korea, China, Taiwan … You have to understand each market very carefully,” says Williams.

In India, investors can have great difficulty pushing through decisions or sensible restructuring plans.
Meanwhile, in China, central government often dictates or interferes with investment opportunities. Either way, local knowledge is essential.

BEST GO DIRECT

Foreign managers at the forum said the majority of opportunities lie in the direct lending space and not in non-performing loans. The reason for this is simple: what makes those outside the region think they can solve the problems that local players can’t? For example, Chinese banks are selling assets at extraordinarily low prices, having decided they cannot turn them around themselves, even with their local relationships and knowledge. On the face of it, there would be a lot of risk for foreign managers in taking over such assets.

But developed markets are not immune from investor caution. Katz said OTPP is also avoiding markets such as Japan and, to a certain extent, South Korea and New Zealand. This is because it sees tight pricing and only a small premium versus making the same loans in the US, Canada or Western Europe – places it is more familiar with.

Edward Tong, senior vice-president at Partners Group, has followed a similar path. “We focus more on developed Asia and look at mature and stable performing companies with a good equity sponsor and good management running the business. Traditionally we have spent a lot of time in Australia and Hong Kong,” he said.

To play it safe, Partners stays away from commodities, investing mainly in consumer goods, healthcare, education and general business services, targeting returns of between 5-15 percent. It would take a brave investor not to agree.