Labyrinth of Asian regulations leaves private credit untapped

[MUMBAI] Asia boasts some of the world's largest and fastest-growing economies, but the region that's keen for more investments accounts for only a fraction of the global private credit market.

From restrictions on foreign investment in India and China to Japan's ultra-low returns, the mixed environment means investors face a fragmented if potentially lucrative market. The legacy of the Asia financial crisis means there's a wariness of hot money flows, while currency volatility that may prompt costly hedging is a particular headache for debt investors.

The amount of new private credit that Asia-focused funds raised last year was just US$9 billion, not even 5 per cent of the global total, according to figures from Prequin, which collects data on alternative asset markets. That compares with private equity investments of US$300 billion in Asia-Pacific, according to Bain & Co.

"Asia has its challenges, or perhaps what I would call barriers of entry," said Edwin Wong, managing partner and chief executive officer of asset manager Ares SSG. "Credit investing has a lot more regulatory hurdles to get through. By and large - and this is a general statement - countries would much more welcome equity investment rather than foreign debt."

Positioned between equity and cheaper public debt, private credit involves businesses getting money directly from a fund, which often offers more contractual flexibility than getting a loan from a bank or even borrowing from a shadow lender.

But bank lending remains the mainstay in Asia, given the institutional knowledge lenders have built up on the various regulations and legal standards across countries, which differ from Europe with its single market.

For example, while a fund without a banking licence can generally lend to a borrower in Australia, China and Indonesia, it's trickier in India, South Korea and Japan, according to a 2022 report by law firm Baker McKenzie. That sometimes forces funds into more complex ways of lending, or to build costlier onshore platforms. Local particularities also play a role in how deals get struck. A 2020 Alternative Credit Council survey found that the lion's share of transactions were originated through personal relationships in Asia.

"Experience and relationships are critical in our view, as are onshore investing capabilities and infrastructure in more complex markets," said Haseeb Malik, partner and head of Asia corporate and traded credit at Varde Partners, an alternative investment firm.

Having started to take off in 2017, private credit in Asia - as elsewhere - suffered a setback due to the pandemic. But for those willing to navigate the tangle of differing rules and regulatory regimes in Asia, the potential rewards are attracting attention. With many Asian economies reopening, growth may take off again. Accelerating inflation could pose a challenge, though private credit deals often have sizeable yield buffers over other transactions and are sometimes partly linked to equity or performance triggers.

The overwhelming majority of companies in Asia are small and medium-sized enterprises, which often struggle to obtain favourable financing conditions. Investments in infrastructure and those to combat climate will require outlays worth trillions of dollars.

"Capital availability gaps remain a significant driver of opportunity in the region," Malik said. BLOOMBERG