Private credit markets in Asia deepen as demand grows

Private credit has been growing in Asia-Pacific, as fundraising, deal activity and returns have seen a steady rise, and the industry has grown in sophistication, Asia-based fund managers said.

Assets under management for private credit in Asia-Pacific rose more than six-fold to $99.3 billion in 2023 from $15.4 billion in 2014, according to Preqin data. AUM growth in APAC has outpaced other regions at 19.5% from 2020 to 2023, compared with the 11.5% global average.

Deal activity in Asia has also been high. In 2023, private credit deal activity fell year-on-year globally — except in Asia-Pacific, with 69 deals, up from 50 in 2022. Comparatively, the number of deals in North America fell to 521 in 2023 from 682 a year ago, and 240 in Europe from 281, according to Preqin data.

Investors have been drawn to private credit globally because of the stable income, high yields driven by interest rates, risk premium and the low correlation to public equities and bonds, money managers said.

Global asset owners and managers that have committed to private credit investments in Asia-Pacific include the Ontario Municipal Employees' Retirement System, Toronto, the Abu Dhabi Investment Authority, and Allianz Global Investors.

In February, alternative asset management firm KKR closed its inaugural Asia Credit Opportunities Fund at $1.1 billion, the largest inaugural pan-regional fund focused on performing credit at the time of close. KKR manages $264.5 billion in credit and liquid assets globally and $185.3 billion in private equity assets, out of a total $601 billion.

Increased interest

Even though Western developed markets have historically been top-of-mind, institutional investors have increasingly become interested in Asian markets because of the higher rates on offer, bespoke deal structures and a more complex industry where various private credit manager are emerging with unique niches, they said.

“In developed market private credit, a lot of their deal structures are off-the-shelf, (so the deal structure) is a lot more standardized," said Eddie Ong, deputy CIO and managing director for private investments at SeaTown, a Temasek-backed alternative investment firm focused on Asia. "In Asia private credit, the deal structure is a lot more bespoke — meaning that it’s highly subject to negotiations in terms of pricing, in terms of credit downside protection, in terms of credit covenants,”

Typically, Asian private credit offers higher rates than in developed markets, with the nature of deal structures meaning higher rates can be negotiated with the borrower, he added. The gap narrowed in recent years when the risk-free rates in the West moved up, but now that the rates in the West have started to come off, Asian loans, which are largely short-dated and priced at a fixed rate, are becoming more attractive to investors, Ong said.

SeaTown has $4 billion in assets under management, and recently closed its second private credit fund at over $1.3 billion.

In addition, the private credit industry in Asia-Pacific has grown more sophisticated. For instance, conversations a few years ago centered on Chinese property, but now, limited partners will find a more diversified range of managers focused on different parts of Asia, fund managers said.

Different managers have an edge now, said Celia Yan, Hong Kong-based managing director and head of Asia-Pacific private credit at the $11.5 trillion BlackRock, during a briefing held in Singapore in September.

“If you have four managers sitting in front of you, they probably have four different niches (and) focused strategies. But if you think about the old days, probably all four were focused on special situations, and a majority on China property or real assets,” she said.

Special situations deal activity is still active in China, she added. But today, we see a wider variety of strategies offered by managers such as performing credit and direct lending strategies — not just in China, but across Asia-Pacific, she said.

“The interest of allocating to China is definitely starting to come down compared to the early stage of private credit investment. So geography-wise, (there is) diversification. You will see that's how we structured our team, and in our investment focus, along with where we see the opportunity set,” she said.

BlackRock’s Asia-Pacific private credit team covers North Asia, which covers mainly Greater China, South Korea, Southeast Asia, and Australia and New Zealand, she said. And even within the regions, there is greater diversification of opportunities.

“Historically, when people talk about Southeast Asia, a lot of (it focused on) Indonesian investment, but we've seen now (more conversation about) Indonesia and Vietnam… Southeast Asia — even though it's fragmented, it's also more diversified nowadays in terms of opportunities,” Yan said.

The team has also been seeing more deals in Australia and New Zealand, and India has started to become a key market, she added.

In September, BlackRock helped fund a NZ$235 million ($145 million) private credit package for the further development of Westgate Town Centre in Auckland for retail, commercial and industrial space.

“We are looking actively at New Zealand,” said Stephen Allan, managing director and head of Australasian private credit at BlackRock, during the Singapore briefing. “And that is generally because the more you do, the more you see your name gets out there, and then people start contacting you.”

“Australia will (increasingly) be the bigger focus, because it's just a bigger universe, and we are seeing a pretty active pipeline coming out of Australia now. So we were optimistic about that,” he said, adding that the area the team is focusing on is structured-type credit, specifically asset-backed lending for corporates and real estate.

“It's a big and diverse part of the Australia and New Zealand universe for credit, and I think we're going to see more and more opportunities in that space,” he said.

The proportions of capital raised for each region by APAC-focused funds have shifted throughout the years. In 2016, for instance, 37% of funds raised was focused on Greater China, 21% on South Korea, 18% on India, 15% on Japan, 3% on ASEAN, 0% in Australia and 6% on the rest of Asia, according to Preqin data.

As of Oct 22, however, zero of the funds raised in 2024 focused on China, 31% on India, 29% Japan, 10% South Korea, 3% Australia, and 27% in the rest of Asia.

Despite the consistent growth of private credit in Asia-Pacific, the region had only an 8% share of global deals at the end of 2023. However, this is likely due to the relatively new nature of the asset class in the region compared to North America, which had 61% of deals, and Europe, which had 28% of deals in 2023, according to Preqin data.

Institutional investors in Asia-Pacific tend to be more comfortable with Asian private credit, particularly because of the yield pickup, money managers said. However, some international investors may be hesitating.

“Looking at the region from the outside, that’s a more nuanced question, because some (international investors) still have questions as to whether the pickup that is rewarding for the elevated perception of default risk, or indeed some of the currency and… legal, jurisdictional risk that may come into play, should we enter a credit downturn event,” said Garvan McCarthy, head of alternatives for EMEA and Asia-Pacific at global consultancy Mercer, in an interview from Hong Kong.

Mercer has $16.2 trillion in assets under advisement and $492 billion in assets under management.

That said, the relatively earlier stage of the asset class in Asia-Pacific means opportunity will only be more meaningful as there is more room for growth and innovation, said Vikram Lokur, managing director at the $1.5 trillion Morgan Stanley Investment Management, who also serves as head of institutional distribution for Southeast Asia and Hong Kong.

“The private credit sector in Asia has become significantly larger than it was 10 or even five years ago. This is a function of various factors including higher growth rates and increased sophistication on the part of issuers and borrowers. The type of assets with financing requirements are broad and varied — these include corporates, real estate, and infrastructure. They are no longer dominated by any specific category or limited to situations like distressed real estate in specific regions. There are opportunities to provide financing across growth sectors, as well as workouts and turnaround situations," he said.

As GDP growth rates in Asia remain relatively high, the need for alternative financing such as private credit is also becoming more relevant to borrowers, leading to "innovative financing mechanisms across the debt capital structure in the form of senior secured, mezzanine, unitranche, or other specialized financings," he said.

"Further, as the private equity industry continues to grow in Asia, its need for acquisition financing as well as fund-level financing would provide increasing opportunities for private credit," he added.

Money managers also agreed that as demand for Asia-Pacific private credit grows, it is important to ensure high quality of the assets, and this involves careful manager selection.

“You want to make sure that the underwriting criteria remains strong, the covenants remain protective, and you also are able to underwrite to a negative case scenario if things do not go according to plan. This could happen, for example, through changes in interest rates, volatility of earnings, adverse macroeconomic or geopolitical conditions, or any combination thereof. In the event that some part of the portfolio defaults, you want the broader portfolio to be strong enough to carry the burden and limit the overall impairment of the net asset value," Lokur said.

Asia is a collection of different countries, where each of them has their own legal jurisdiction, cultures and business practices, Seatown’s Ong said.

“But the flip side of that is it then has a lot of opportunities that we can access that is harder for a typical someone who's from the developed markets to access. You need to go with managers who have spent a long time in Asia markets to be able to navigate these sort of investments,” he said.