Moody’s warns Asia-Pacific private credit expansion to slow

[SINGAPORE] Growth in private credit fundraising and deployment in the Asia-Pacific (Apac) region will slow over the next 12 to 18 months, according to Moody’s Ratings.

This comes as macroeconomic uncertainty, geopolitical tensions and elevated interest rates weigh on investor appetite for illiquid assets.

Redemption requests that have hit global private credit funds have resulted in greater scrutiny of liquidity terms and may temper incremental inflows into the Apac region, especially from retail and wealth channels, Moody’s analyst Sean Hung wrote in a report dated Monday (Jul 6).  

The wave of withdrawals, largely from wealthy retail clients, that has engulfed US private credit funds has shown little signs of abating, with second-quarter exit requests more often than not exceeding those of the prior three-month period.

Still, fundamental demand for private credit in Apac should remain robust, underpinned by economic expansion and bank retrenchment from riskier and capital-intensive lending, according to Moody’s.

“Private credit markets in Apac are less driven by retail-oriented structures and have less exposure to sector-specific risks,” according to Hung.

“Apac’s economic growth and (its) need for flexible financing should sustain strong private credit demand.”

A number of new Apac-focused funds are looking to raise money, including a US$1 billion private credit fund from Varde Partners. 

Increasing regulatory oversight across the Apac region and a greater emphasis on investor protections, particularly where products are distributed to retail clients, will likely “lengthen fundraising timelines and constrain capital formation in these segments”, according to Moody’s.       

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That said, structural funding gaps in the Apac region should support long-term expansion in the sector. 

“We expect Apac private credit assets under management to continue growing faster than that in the US and Europe when foreign exchange effects are excluded, although the market will remain much smaller than those in the US and Europe,” Hung said. BLOOMBERG