Asia private credit debates changes to soothe jittery investors

[SINGAPORE/SYDNEY] Some of Asia’s private credit firms are mulling changes to the industry, including longer lock-up periods and higher redemption caps, after turmoil in the US in recent months increased scrutiny from investors and regulators across the region.

Muzinich, a global institutional asset manager specialising in corporate credit, said that allowing a higher redemption cap above the typical 5 per cent if some conditions are met is one of a slew of considerations being looked at by the sector, according to its Asia head.

In Australia, managers are putting more focus on explaining underlying holdings and guardrails to investors. Meanwhile, regulators in Japan and South Korea are requesting better disclosure and data into the sector.

The changes coming in an industry beset by doubt over its health underscore how investor anxiety and heightened regulatory scrutiny are forcing developments in the wake of several bankruptcies of corporate borrowers in the US. Senior industry executives have said that the sector has failed to make understanding some investments straightforward.

“Given the noise and concerns around the structures and asset, the industry will surely adapt,” Andrew Tan, Asia-Pacific CEO in Singapore for Muzinich, a global institutional asset manager specialising in corporate credit. “This is part of the process that we have seen time and time again with regards to how innovative the finance is and how quickly it’s able to adapt.”

Asia is becoming an increasingly important source of capital for global private credit funds. The region’s wealth channel has funnelled around US$48.8 billion into private credit funds, according to data provider Broadridge Financial Solutions.

Over in Australia, managers are putting more focus on educating customers by publishing more research papers as they have realised some investors do not understand elements of private credit investments, said Liam Shorte, a financial planner at Sonas Wealth in Sydney.

“Business development managers have also stepped back on selling private credit products and concentrating on explaining underlying holdings, investment philosophy and guard rails used by the manager,” he added.

Investor access to their cash has also been central to the discussions. Recent actions to limit redemptions by firms, including Apollo Global Management and Blue Owl Capital, may prompt managers to focus on closed-ended or longer lock-up period strategies to improve alignment to asset liquidity with investor expectations. The changes could include more flexible hybrid structures to better accommodate redemption requests from certain retail investors.

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Open-ended evergreen funds have boomed in recent years as managers sought new ways to attract individual investors. Unlike their closed-ended peers with predefined exit horizons, evergreens do not have a fixed termination date. They also allow investors to cash out at periodic intervals and accept money on an ongoing basis.

“Restricting redemption requests remain an important tool for asset-liability management and investor protection,” said Sally Yim, managing director of Moody’s Ratings. “However, these developments suggest that some investors may not have fully appreciated how these mechanisms operate in practice, or the liquidity risks embedded in these structures.”

There’s also more scrutiny on the managers. Japan insurer Daiichi Life Group’s alternatives investment arm said that it will more strictly assess managers’ performance and Connie Sin at Nomura Holdings told a conference last week that clients are probing them with tougher queries on a number of elements.

“A lot of our clients are asking more questions, as they should, on the fund managers themselves,” said Sin, the head of funds and alternatives for Nomura’s international wealth management division. Also, “on how they have been disciplined in valuation, how solid their pipelines are, and how they manage liquidity”.

Regulators in Australia, Japan and South Korea are seeking more disclosure and data into the sector, often criticised for lax underwriting standards and failure to clearly explain liquidity restrictions.

A testing mechanism that allows for raising the redemption cap per quarter above the typical 5 per cent baseline if certain liquidity criteria are met, is among the considerations, said Muzinich’s Tan. Higher liquidity, however, could mean lower returns for investors, he cautioned.

“Some consultation between GPs and LPs will need to happen to determine what the happy medium is when tweaking the structure,” he said.

To be sure, the popularity of evergreen, open-ended funds is not going away due to their long-term appeal, especially to retail investors, said Kher Sheng Lee, co-head of Asia-Pacific at the Alternative Investment Management Association. In Asia, they will continue to co-exist with closed-ended vehicles, with structures chosen to fit the underlying assets and investor base, he said.

Still, some see a shorter-term hiccup to the sector’s growth. In South Korea, the expansion of private credit investments among both retail and institutional investors is likely to “slow down in the near term due to the recent strain in the US market and regulatory concerns”, said Daehyun Kim, director of financial services ratings in Hong Kong at S&P Global Ratings. He still expects growth in the long term as institutions seek diversification and higher yield. BLOOMBERG