Relative value greater in Asia – PDI Asia Forum

Private debt in Asia offers more attractive risk-adjusted returns on a relative basis compared with North America and Europe, delegates at the PDI Asia Forum heard last week. Market veterans, in particular, were aware of the pitfalls as well as the opportunities.

The macro-economic headwinds facing China and the rest of Asia did not escape the attention of panellists at PDI’s second private debt conference in Hong Kong, last week. 

However, as Helen Wong, founder and chief executive officer of LAPIS Global, highlighted, fundamentals are more important when investing in private debt.

China is seen as an exciting opportunity, but a pan-Asia-Pacific strategy appears to be the one many investors and managers are targeting right now.

Despite not having the safety net of a robust legal framework available in more developed markets, and being a notoriously difficult region for private investment, Asia still offers better relative value compared with North America and Europe. 

“[With] senior debt and performing credit, we generally see more conservative credit structures,” said Adam Wheeler, managing director at Babson Capital Management. In the US and Europe, it is a more crowded space. “Certainly regulatory changes will provide an opportunity.” 

Jake Williams, deputy group chief risk officer at Standard Chartered, said his bank would be aiming to shed $50 billion in risk-weighted assets.

“I think there is a big opportunity here. Non-performing loans are rising and it will be a real opportunity if you know what you’re doing … and how business works here,” he said.

However, he feared a rush of capital into the region from the US without a firm grasp of all the risks attached. There would be a lot of sellers, but an influx of capital could hit the profitability of such trades, he said. 

As Helen Wong agreed later in the day, when doing business in the region, “you have to know your partner”. 

One of the great things about the private market was the flexibility on offer compared with publically-traded markets, Williams said. 

“The spread between private and public has never been so great and Asia wins that footrace towards being the cheapest,” Robert Appleby, director at Asia Debt Management, said, comparing Asia with North American and Europe.

Stefan White, portfolio manager from LIM Advisors, added: “There are great deals floating around the developing markets. It’s just a matter of having the network.”

Chris Mikosh, co-founder of Tor Investment Management, which extends bridge financing, believed that there was as much as 500-700 basis points available between their investments and similar risk in the US.

Investors with more long-term lending ambitions were also visible. Sankaty Advisors and Partners Group are global managers looking to make waves in Asia.

“There are a lot of opportunities that didn’t exist here a couple of years ago,” David Yu, senior vice-president at Sankaty, said. “There are good opportunities to work on capital relief trades.”

SSG’s Edwin Wong remarked that “everyone wants to be in Asia”.

“Most of them are trying to break into more exciting markets,” he said before stressing: “It’s not easy. It’s really not easy.” 

It’s a process which involves finding local people and training them, “but all that takes time”.

Wong argued that in more frontier markets it’s harder to build scale and he would rather go deeper into a bigger market.

Religare, an India-focussed private debt manager which made a presentation at the Forum, showed that there were more domestic players joining the private debt scene. But when compared with the number of firms in private equity, there were still only a few players.

Another trend of note was that many Chinese and Asian investors were turning their attention elsewhere following China’s recent market crash and the expected increase in defaults, much of it related to real estate or anti-corruption drives. 

“Unbelievable amounts of money is flowing out of China,” Eric Solberg of EXS Capital told delegates. That money was flowing into Japan and Australia, as well as the US and Europe. 

Even so, there remains vast amounts of liquidity in China, which, along with the increasing regulatory pressures facing banks, should create an interesting dynamic for the growth of private debt in China and beyond.