SeaTown Holdings International: Asia private credit delivers new opportunities for LPs

The strategy is looking favourable compared with global equities and credits, says Eddie Ong, deputy chief investment officer at SeaTown Holdings International.

Eddie Ong

This article is sponsored by SeaTown Holdings International

Describe the current macroeconomic backdrop in Asia, and what does that mean for private credit?

We are seeing rising interest rates in Asia, as we are globally. There is also deglobalisation going on between China and the US, with more nationalistic interests prioritised over the benefits of global trade. The conflict between Russia and Ukraine, and between Russia and the EU, is creating higher energy prices for all industrial economies. All these developments point to a sustained period of high inflation.

In Asia, we saw the opening of markets post-covid in 2022, and in China we are seeing that in 2023. Hence, we are likely to see sustained inflation in 2023-24 resulting from a shortage of labour on the back of increased demand for goods and services, and rising energy costs.

These factors mean equity growth prospects will likely be dampened by cost pressures. Most corporate balance sheets have been fairly levered over the past decade. With rates on the rise and valuation multiples remaining compressed on the back of weaker earnings growth, credit will likely remain a more attractive asset class on a risk-adjusted basis. Within Asia credit, private credit has been more resilient than public credit, particularly in emerging markets.

Where do you see the biggest opportunities and challenges in Asia’s private credit market today?

In Asia, the private credit market has always been growing but less developed than private equity and developed markets private credit. Globally, private credit is about 30 percent of the AUM of PE and Asian private credit is only about 7 percent of DM private credit, so it is still small by comparison and has huge growth potential based on Asia’s share of global GDP.

From an acquisition financing standpoint, Asia’s PE GPs have raised record amounts of money. This will likely translate into more private financing opportunities when traditional channels of financing are less readily available.

China’s reopening will mean opportunities for travel, hospitality, and real estate-related financing. China/Hong Kong public equities and credit markets recovering from an extreme dislocation would also mean investors getting into Asian private credit now will likely be riding an upswing as credit quality improves.

As Asia is a big heterogenous market, investors will find the different legal and regulatory jurisdictions and business practices more challenging than developed markets in the US and Europe. Having said that, we do get very attractive risk-adjusted returns in Asia, both from a pricing standpoint and downside protection.

What do borrowers look for from private credit managers in this environment?

Smaller-sized borrowers globally are facing limited access to banks and syndicated loan markets, and that presents opportunities for private credit. What they look for is not necessarily lower pricing but flexibility of structures. Private credit lenders can be creative in deal structuring to tailor financing solutions to each borrower.

Each business will have different demands for cashflow at different points in its life cycle. Hence, the structure of each credit solution needs to fit into a company’s growth trajectory. We must be holistic in how we think about collateral and downside protection which are supportable by the borrower’s balance sheet and servicing capabilities.

Most borrowers prefer a reliable lender with a good brand name that acts as an endorsement for the borrower’s profile. They want to build long-term relationships with their lenders as most borrowers want additional avenues to access capital, either through credit or equity solutions. If a fund management firm can offer varied financing options across the capital structure, that is attractive to a borrower as that relationship can ride through business cycles.

Size matters, too – larger lenders can provide sizeable credit financings for borrowers who often prefer to work with fewer parties to arrive at an expedient financing solution.

What is unique about SeaTown’s approach?

For us, it is our heritage as a multi-asset investment platform. Fourteen years of multi-asset investing through cycles and various market conditions have developed and harnessed competitive domain knowledge across asset classes, from public to private investments and from equity to credit assets. We have a robust understanding of the different asset classes, which enables us to transact better and mitigate risks across the asset classes.

Our network has also allowed us to tap into a global ecosystem that enhances our deal sourcing and underwriting capability. Our access to regional operating companies and an extensive industry network helps facilitate more comprehensive diligence and market intelligence.

SeaTown has been investing in private credit for the last decade, and our private credit senior team members have almost three decades of private credit experience. They started analysing and underwriting credit investments in the mid-1990s, just before the Asian Financial Crisis, and we have ridden various financial cycles in Asia since. With strong deal structuring knowledge, enforcement experience and working with borrowers through business cycles, we believe we are in a good position to structure bespoke private financing solutions that will survive business downturns.

When evaluating private credit opportunities, we aim to take the lead on these transactions when possible. However, we have also fostered a culture of working with our peers – other private credit funds with whom we have developed strong relationships at various levels. This has enabled us to optimise our investment opportunities in larger deals across geographies and sectors.

How do you see LP appetite for the asset class evolving in Asia this year and going forward?

In the last 12-18 months, LPs have come around to the reality of a lower equity return environment. As they experienced the volatility and returns across various asset classes, we believe Asian private credit delivering low- to mid-teens net return stands out as a compelling risk-adjusted asset class.

Asian private credit has a superior value proposition over DM 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 DM credits. In this high-interest rate environment, its risk is much lower compared to DM credits.

From an allocation perspective, we believe that globally, private credit is under-allocated versus PE, and this is even more pronounced in Asia. Therefore, we are optimistic that Asian private credit has much more growth potential ahead.

The challenge for many global LPs in Asia is seeking out good managers as the strategy is still relatively young here. We do see some LPs relying on well-known PE managers in Asia that are getting into private credit, but we believe that the good private credit managers are those that have experience managing such investments through the crucible of various crises. It is only by navigating periods of dislocation that managers can build the depth of expertise required to get through the next challenge.