Weighing the case for emerging Asia

A glance at the data indicates good growth prospects for private debt in the region. Yet, according to market players, much remains to be done. Adalla Kim reports

From how distressed debt in China should be viewed, to tapping into performing credit in India, senior executives and managing directors from numerous institutions have been sharing their predictions for private debt in Asia-Pacific’s emerging markets.

According to the International Monetary Fund’s latest report, Regional Economic Outlook: Asia and Pacific, the phrase ‘emerging Asian countries’ refers to China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

The International Finance Corporation’s latest data in October 2019 on individual countries’ share of global gross domestic product as purchasing power parity show that China currently accounts for 19.25 percent of the world’s total GDP. The figure for the US is 15.11 percent.

But despite the IFC’s growth projections for emerging Asian countries, industry sources say that not much has been done in the region when it comes to private credit.

Speaking at November’s Private Debt Investor Capital Structure Forum 2019 in London, John Graham, Canada Pension Plan Investment Board senior managing director and principal credit investments head, said: “Credit is a laggard in emerging markets … Part of it is emerging markets are not typical credit markets. They tend to be equity markets.”

Nonetheless, PDI reported that, during 2018, CPPIB’s credit team provided a debt facility to a global alternative investment manager that was looking to lever up an acquisition of a non-performing loan portfolio in China. Moreover, CPPIB is not alone in its push into emerging Asia credit.

Among global alternative asset managers that have been actively building up their private debt portfolios in the region, BlackRock has focused on various types of strategies, from liquid credit markets to privately placed direct lending, opportunistic credit, distressed debt and special situations.

During a private credit panel at the Hong Kong Venture Capital and Private Equity Association’s Asia Private Equity Forum 2020, held in January, Michael Dennis, Hong Kong-based managing director and Asia-Pacific head of capital markets at BlackRock, said: “Private credit, for a number of reasons, has become more and more attractive. The most obvious one is from the much shorter J-curve perspective.”

According to Dennis, global asset allocators are looking for yield pick-up, particularly in the structural return components of private credit deals in Asia.

Funding challenges

Benjamin Fanger, ShoreVest Capital Partners’ founder and managing partner, told the audience at the same event that more Chinese corporates had been facing funding challenges over the past year when trying to extend their credit lines with banks. “They cannot extend their loans even if they are senior secured, backed by real estate,” he said.

Fanger noted that China is the second-largest credit market in the world, observing: “Which banking system has the ability to service or run trillions of dollars of the writedowns?”

Co-CEO and co-CIO of Fiera Capital’s Asian division, Robert Petty, agreed with Fanger’s observation on current dealflow thanks to regulations on real estate debt transactions in China.

“The banking system is reticent to put a lot of capital into the real estate market,” he said. “It gives all of us [private debt funds] the opportunity to write compelling covenant packages and get higher rates.”

Kanchan Jain, a Delhi-based managing director and head of India credit at Baring Private Equity Asia, speaking during a credit panel at the event, said that there is a large pool of mid-market corporates in India with operating histories of more than 20 years.

“The demand for capital is tremendous,” she noted. “You can extract very strong collateral and structural returns.” She claimed her team could pick up additional yield, ranging from 400 to 500 basis points, in a private debt deal, compared with cases in which the same borrowers funded themselves in the capital markets. These observations were, Jain noted, based on credit investments her team had made through a fund that is fully deployed.

Data compiled by PDI show that BPEA’s first India-focused credit fund was launched in February 2017 after its acquisition of Religare Global Asset Management’s credit unit in India.

An industry source who invests in Indian private debt through direct lending and real asset-based debt funds agrees with Jain on structural returns from private debt transactions in India. “There are very few large economies that have positive real interest rates,” says the source.

Governance risk

According to Jonathan Vanica, Hong Kong-based head of Asia private credit at Goldman Sachs, poor governance frameworks and unfavourable bankruptcy regimes are two of the top risks in the region, though key components and stages of development differ country by country.

Jackson Chan, a Hong Kong-based managing director at Eaton Partners, a global GP advisor, informs PDI that his team has been conducting in-house research on South-East Asian private debt opportunities. “[Still], there are not many players, and there are not many players who have been around for a long time,” he says.

Chan adds that because of the characteristics of the private debt asset class and the complexity of debt in the region, his team wants to work with managers with local roots, who know the jurisdictions well and understand all the relevant regulations.

Mingchen Xia, Hong Kong-based co-head of Asia investments at Hamilton Lane, offers his views on the regional private debt investment landscape as a fund-of-funds manager and co-investor in direct deals.

“The regional private debt funds are taking a different approach in each market, because the opportunity set in each country can be a little bit different,” he says. Xia adds that his team have observed distressed debt, special situations, and direct lending opportunities in the emerging Asian markets such as China and India, and in North and South-East Asian countries.

He notes the presence of country-focused funds, mainly in India and China. “These [private debt] markets are still small, compared to the US [market], but the investments are happening … and GP fundraising is active.”

Many global asset allocators still view emerging Asia-focused private debt as a niche strategy. One source told PDI that, although their team has exposure to more than 10 countries in Asia-Pacific, including six emerging countries, they still mainly focus on US direct lending strategies for their private debt allocation.

Only time will tell whether emerging Asia will appear on more investors’ radars. Although many can see the potential, the reality is one of slow, measured steps.