As money pours into private credit funds, will there be enough borrower demand?

ASIA’S rapid economic growth and recovering deals pipeline should keep private credit funds supplied with plenty of borrowers, industry players said, amid a growth in lending appetite.

But not everyone is convinced there will be enough borrowers at the right price, and some managers believe the most fertile ground will remain in the more mature markets of the United States and Europe.

Fiona Gray, banking partner at law firm Linklaters, is one of those who sees plenty of opportunity. Noting that Asia is expected to account for 58 per cent of the world’s GDP by 2030, up from 45 per cent in 2022, she anticipates plenty of demand for capital.

More of that capital will also come from the private credit industry, she said, as private credit lenders are typically more flexible on terms, and more open to lending across a wide range of industries.

“What we are also seeing is funds that haven’t previously invested in emerging markets in the region are now contemplating that,” she added. The most attractive market within emerging Asia is India, with Vietnam coming in close behind.

Borrower demand is being helped along by investment bankers, who are wising up to the options that the private credit funds can offer their clients.

The bankers at Bank of America (BOA), for instance, are doing more work with capital providers in the private markets space than before. This is especially so as deal pipelines are gradually becoming unfrozen.

Martin Siah, BOA’s South-east Asia head of global corporate and investment banking and the bank’s Singapore head, said: “As a banker, you have to look across the whole capital spectrum – which includes equity capital markets, debt capital markets, as well as private markets.”

He said there is risk aversion in boardrooms because of two major uncertainties: how the US election will pan out, and when the US Federal Reserve will cut interest rates.

This means companies may put on hold plans to tap equity or debt capital markets. But they may still need liquidity solutions, and it is here that private lenders can step in, he added.

Hurdles to cross

Siah acknowledged the nascency of the private credit market in Asia, though. “It will take a few transactions, and there needs to be some awareness as well,” he said.

“The US is a very deep and mature market for private credit, for instance, but in Asia, because of an overall reliance on traditional bank debt, it may take more time.”

Indeed, Ong Eng-Lye, partner at law firm Dechert in Singapore, expects private credit funds to see the stiffest competition in the leveraged finance market – where banks are strongest and continue to enjoy the advantages of incumbency in local markets.

“The private credit funds likely to be the most successful in Asia are those that have a clear strategy for identifying and focusing on their target markets, cultivate strong relationships with sponsors and corporates, and are able to demonstrate their value-add to justify higher borrowing costs,” he said.

Developed versus developing

Jean Woo, office managing partner in law firm Ashurst Singapore, said funds will also need local experts.

“Commitment to the region is vital to being a leading player in the market because competition is very tight,” she said, adding that the legal and regulatory framework for credit and security in Asia is complex.

For example, she said, private credit providers may not always be able to obtain the full security over an asset for reasons such as high stamp duties or regulatory restrictions.

Adding to this difficulty, she said deals in Asia, on a like-for-like basis, are typically priced about 30 per cent lower than in the US. “At the end of the day, (credit) providers will have to accept these limitations to complete a deal in Asia.”

Lower margins, greater regulatory complexity and a limited number of deals make the Asian market less attractive for some private credit players. Several general partners The Business Times spoke to said they prefer to remain focused on developed and mature markets such as the US, Europe and Australia.

Among them is Juan Delgado, co-chief executive at private markets manager and adviser Hamilton Lane, who said Asian credit doesn’t offer relative value. This is especially so with US interest rates as high as they are.

Indeed, data from MSCI shows returns from private debt in Asia falling behind those of both global and US benchmarks across multiple time ranges. The 2023 return from global private debt, for instance, was 9.4 per cent. It was just 2 per cent for the Asia market.

But Gray of Linklaters said some private credit lenders are willing to overlook these shortcomings because they are looking to build their presence here. “I also think that it’s about wanting diversity in the portfolio,” she added.

Given that private credit funds are likely to continue having plenty of capital to deploy, casting a wider net may end up becoming inevitable.

Thierry Celestin, head of private assets at Lombard Odier, expects the private credit space to continue growing as banks pull back and investors show increased appetite for direct lending.

The private bank prefers managers that “demonstrate a strong sourcing ability”, he said. “It is critical for credit managers to see a large deal flow of financing opportunities to be selective and finance the most attractive deals and companies.”