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Private credit in Asia set to grow

SMEs can benefit from the more flexible capital arrangements offered.

THE private credit story is a fascinating one. Since the start of the new century, the size of the industry (measured by assets under management) has grown nearly fourteen-fold at an approximate compound average growth rate (CAGR) of 20 per cent, making it the fastest growing alternative asset management sector today.

In recognition of this growth, the Alternative Investment Management Association (AIMA), the global representative for the alternative investment industry, established the Alternative Credit Council (ACC) in 2015 to represent asset management firms in the private credit and direct lending space.

The ACC now represents over 140 private credit managers globally that account for approximately US$450 billion of private credit assets. Our annual research paper "Financing the Economy" has become a key bellwether of the market's development.

A key part of our mandate as the global representative for the private credit industry is raising awareness of the sector and the opportunities it provides to investors.

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While private credit activity in the Asia-Pacific region is in its infancy, the level of interest has increased in recent years. Like the influence it holds in North America and Europe, it is fast becoming an integral segment of the asset management industry.

Since 2015, the number of Asia-Pacific-based investors' private debt mandates nearly doubled from 29 per cent to 55 per cent. As a measure of the size of private credit AUM for Asia-Pacific over the same period, it has increased three-fold.

Singapore-focused private credit managers' assets climbed from US$362 million to US$698 million.

Over the past two years, we have been more active within the Asia-Pacific region, forming a committee of locally-based managers in 2018 and undertaking our first survey of private credit in Asia-Pacific at the start of this year. We presented the initial findings of this survey at a seminar on private credit in Asia-Pacific earlier this month. This acted as a precursor to AIMA's annual flagship forum in Hong Kong.

The key findings confirmed that while private credit faces challenges, there is a significant opportunity waiting to be realised.

1. Nascent industry ready to take off

The market for private credit in Asia-Pacific remains small compared to other regions globally, but its capacity for growth is unrivalled. Recent data from Preqin show that only 4 per cent of global investments in private credit are made to Asia-Pacific funds. Over 60 per cent are made to US-focused credit funds and one third to Europe-focused funds.

At the same time, banks operating in Asia-Pacific have adjusted their lending activity in response to changing regulatory capital requirements like Basel III, echoing past developments that impacted the lending landscape in Europe and the US. With banks reluctant or unable to provide the same level of finance to markets like the small and medium enterprises (SMEs) and real estate sectors, private credit is filling this funding gap, boosting regional and international development and supporting the economy in new ways.

Results from the survey reveal that 20 per cent of borrowing in Asia-Pacific is already directed at SMEs. By comparison, most of all private credit financing demands in Europe and the US tend to come from the SME/middle market.

Furthermore, capital constraints on traditional lenders mean that they are also less likely to offer the tailored finance solutions needed for SME growth. The enormous potential for growth in this sector is clear when one considers China, where 97 per cent of all businesses are SMEs. All these firms can benefit from the more flexible capital arrangements offered by private credit.

2. Untapped potential for institutional investors

The survey results show that private credit investment in Asia-Pacific is currently driven by high net worth individuals and family office capital. Taken together, these investors account for nearly one third of all capital invested into Asia-Pacific private credit funds. In comparison, allocations to private credit funds outside Asia-Pacific tend to be dominated by institutional investors like pension plans, insurers, endowments and foundations.

The low institutional investor presence in the Asia-Pacific private credit market could interest large, international investors looking to diversify their portfolios and access high-yield opportunities.

Apart from helping to finance regional growth, the popularity of allocating to private credit continues to increase as the asset class yields solid returns. For example, last year, global direct lending funds and private credit funds reported low-to-mid double-digit returns.

3. Fundamentals for private credit remain strong

The survey's findings demonstrate a clear preference among Asia-Pacific private credit respondents for senior secured lending, mirroring the global trend.

Furthermore, data from the ACC's recent research, "Financing the Economy 2018", revealed that 60 per cent of all private credit managers surveyed saw no noticeable change in the terms of financial covenants.

The Asia-Pacific survey data revealed that only 8 per cent of managers reported a loosening of covenant terms in their loan agreements. This suggests that the underwriting and due diligence of private credit loans in Asia-Pacific remains strong.

Conclusion

The future looks bright for alternative credit managers in Asia-Pacific, with plenty of opportunities to grow.

There are large sections of the regional economy that need finance to expand and observant institutional investors have an opportunity to secure attractive yields and diversify their portfolios. Importantly, there is enormous potential to help drive economic development and regional growth.

The ACC's work is vital to raise awareness of the advantages offered by private credit and support its sustainable growth.

We will continue to work closely with alternative credit managers, policymakers and other industry thought leaders to ensure the stable development of the industry across Asia-Pacific and worldwide.

  • Jiri Krol is deputy CEO, global head of government affairs, Alternative Investment Management Association (AIMA); Kher Sheng Lee is managing director, co-head of APAC and deputy global head of government affairs, AIMA