Private debt specialist Muzinich expects ‘exponential’ growth in Apac

THE Asia-Pacific (Apac) is expected to generate “exponential growth” for private-debt specialist Muzinich & Co, both in terms of fundraising and investment opportunities.

The firm, which manages more than US$41 billion in public and private-debt assets, is gearing up to launch its second Apac private-debt fund sometime next year. Its expansion comes amid rising concerns over credit quality in the US$1.7 trillion private-debt market and the knock-on effects in the banking system.

Andrew Tan, the firm’s Apac chief executive, said: “We continue to see Asia as a big growth region where we can look to achieve exponential growth, simply because the savings rates and cash deposits in some countries are very significant.

“We think as interest rates come down, there will be a strong interest (among investors) to see how they can get a better outcome or return. And they will certainly look towards our strategies as a good way to generate return.”

Justin Muzinich, the firm’s CEO, said Apac is also “a lot less crowded” than the US private-debt market as it remains bank-dominated.

Discussions to suss out interest in the second Apac fund are “very preliminary”.

“We’ve started to have conversations and my sense is there is a good amount of interest. We’re going to start to raise funds for it early next year,” he added.

Roughly about a quarter of the firm’s assets under management comprises private debt. In the public space, it specialises in high-yield and corporate debt.

The firm was founded in 1988 by Justin Muzinich’s father, George Muzinich, during the US’ savings and loans crisis. It began to invest in high-yield debt, nascent at the time, and rolled out its first high-yield fund in 1990. The elder Muzinich is executive chairman.

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The younger Muzinich was US deputy secretary of the Treasury in 2018-2021, and was named the 73rd Lee Kuan Yew Exchange Fellow in 2022.

Tighter spreads in upper-middle market

On the market, Justin Muzinich observed a tightening of spreads in the upper-middle market segment, which accounts for the majority of the industry and includes the financing of private equity deals. “There is much less value in that part of the market today than there has been historically.”

Spreads in that segment were historically at around 650 basis points (bps), and today deals are done in the “low-500 bps or high-400 bps”.

“Covenants are a little lower or not as good because there’s been a lot of money raised. I don’t think we’re headed for a big fallout. But I think you’ll have a vintage of funds in the upper-middle market where the returns aren’t as good as they’ve historically been, as spreads are lower and you may have credit issues.

“The flip side is investors have become sophisticated enough to differentiate between different parts of private credit. We’re finding very good values in some areas – the most notable one is bank partnerships.”

In the context of Asia, Tan, who is also head of Apac private debt, said it is important to scrutinise valuation methodologies.

“We’re very conservative in how we value our positions and the structures we put in place. We tend to shy away from the full payment-in-kind (PIK) structures that are a little bit more popular in some parts of Asia. Because it could be a situation where things don’t go according to plan; you’re not getting any income; the principal is accumulating, and you’re waiting for a finite exit point. If the exit doesn’t happen then all bets are off. We try to avoid those structures.”

PIK refers to arrangements where interest payments can be deferred and added to the principal. S&P Global has raised concerns that this could be equivalent to a “selective default” and may mask the sector’s true default rate.

Rich pickings in Apac

For now, Apac offers rich pickings for Muzinich.

In 2021, it raised US$500 million for its first fund – the Muzinich Asia Pacific Private Debt I – with DBS as the anchor investor with a commitment of US$200 million. At the time, DBS said its investment would enable “growth exposure to growth opportunities in Apac”, and extend and diversify its traditional loan portfolio.

Last year, it launched an Infrastructure and Real Assets Private Debt Strategy, in partnership with Hong Kong-based Orion3 Group.

The strategy will provide debt financing and capital solutions for middle-market infrastructure and real asset companies. A key theme is to support businesses in their energy and climate transition efforts towards net-zero.

For the new Apac debt fund, the firm expects to invest in “deals that involve some complexity that banks naturally can’t do”, Tan said.

“We can embrace complexity and get paid for that (so that) our investors can earn a good return. There are also deals with a structuring element where we can protect ourselves, and we’ll also have the ability to make purchases in the secondary loan and bond market if there are special situations where we think we can achieve good risk-adjusted returns. Public markets in Apac can often be less efficient than in the US or Europe.”

One of the firm’s areas of focus is parallel lending, which Justin Muzinich expects to be a fast-growing segment of private debt. In parallel lending, banks and private credit managers co-originate loans for small and medium-sized companies, a win-win proposition for both parties, as well as for investors.

For asset managers, such co-lending partnerships enable access to an attractive deal flow. For banks, it enables participation in the booming private lending space, while still maintaining a capital-light footprint on their balance sheet. Investors benefit with an attractive income stream and avoid the volatility in public markets.

Justin Muzinich said: “In terms of bank partnerships, we’re very positive. We think the risk-adjusted returns are extremely interesting, and we’re finding a lot of interest from investors.”

In 2023, the firm rolled out an evergreen MLoan Fund, a semi-liquid European private-debt strategy where the target allocation is 80 to 90 per cent in parallel lending; 5 to 10 per cent in syndicated loans; and up to 10 per cent in direct private lending.