Private debt funds bullish on Asia lending prospects

Executives speaking at the HKVCA Asia Private Equity Forum 2016 said that private debt opportunities abound as banks face regulatory constraints.

Private debt managers speaking at the HKVCA Asia Private Equity Forum 2016 were optimistic about the prospects for private debt across Asia, as banks face regulatory constraints that crimp lending to smaller companies. 

The need is particularly acute in China. “In China today, the big banks all have loan restrictions, they are lending to big SOEs [state-owned enterprises],” said Robert Petty, co-founder of Clearwater Capital at the forum held in Hong Kong. “The SMEs [small- to medium-sized enterprises] really don’t have a lot of financing alternatives.”

He added that short-term bank loans in China are usually one-year in tenor and trust financing companies are not allowed to refinance each other, which leaves a gap for private debt funds to fill. 

Barry Lau, chief investment officer, private credit at Adamas Asset Management described the opportunities in China as being “very compelling”. The Hong Kong-based private manager late last year launched a $500 million joint venture with Chinese insurer Ping An, targeting SMEs. 

Lau told a packed room that Chinese SMEs face a shortfall of between $7-$10 trillion in funding based on recent studies. By contrast, Asia direct lending funds that are focused on China have “dry power” of about $6 billion, he added. 

Given the huge pool of companies seeking funds, how do private debt firms source deals? 

Edwin Wong (pictured), chief investment officer of SSG Capital Management said his firm usually self-originates deals with people they already know, rather than by fielding calls from dealers. His firm typically looks at loan sizes of $25 million-$100 million. 

“The lion’s share of what we do is originated by the guys on the ground. It’s from friends we know, the tycoons we do business with, all their friends that get in trouble,” said Wong.

While opportunities to lend to companies that have fallen upon hard times abound, investing in distressed debt comes with its challenges. 

Sabita Prakash, head of investor relations and business development at ADM Capital, said that investing in distressed debt in Asia requires the legal expertise to navigate unpredictable regimes along with “nerves of steel”. She added that her firm makes a clear distinction between investing in distressed debt and “stressed” debt, where companies have difficulty gaining access to funding. 

In addition to direct lending opportunities, Clearwater’s Petty also sees opportunities within public markets as mutual funds have been hit by redemptions and some corporate bonds are trading at stressed, or even distressed levels.

“Every single mutual fund in the credit space is getting crushed … You can go to the public markets, just to use public markets as a proxy, and buy things (at 50 cents on a dollar) that are performing,” said Petty.