Institutional investors still see the US as first choice for private debt opportunities as Asian countries are still working on market maturity. But asset owners are setting a clear trend: they are allocating more to private debt to capture higher returns.
“Now we are increasing private debt given the low interest rate environment has been going on for a number of years now,” Alvin Ying, chief investment officer at BOC Group Life Assurance (BOC Life) told Private Assets Investment Week hosted by AsianInvestor yesterday (September 13).
BOC Life, the Hong Kong-based insurance unit of Bank of China, has an asset portfolio worth more than $15 billion.
“We might have to gravitate more towards mezzanine-type strategies or unitranche strategies where the credit spreads are wider, but there's less use of portfolio leverage,” he explained.
Private debt fundraising declined across the globe last year during the height of the Covid-19 pandemic, but the 2021 rebound has been swift thanks to a surging economy, liquidity in the credit markets and businesses avoiding default, according to a Global Private Debt report published in August by Pitch Book, the American Investment Council and UMB Fund Services.
Following a resilient 2020, private debt fundraising remained on a steady course in the first half of 2021. The $72.5 billion raised across 81 funds is approximately on pace with the last few years and may even surpass five-year averages once final data is collected.
Direct lending continues to be the standout strategy within this market, accounting for a majority of capital raised.
Ying said BOC will continue to invest in private debt for some years to come.
“In five to 10 years’ time, we could be double where we are now. Currently, we're around 2% to 3% in private debt and I see high single-digit growth in allocation,” he said.
He believes the firm will have to change its product design and internal liabilities to reach this point. But he doesn’t see BOC’s investment grade portfolio going below 70% for the next five to 10 years. “From the current 80% level invested in investment grade assets, there might be an extra 10% we will be able to allocate to private equity, public equity and private debt,” he explained.
The US still dominates supply in the private debt market, Ying noted.
“The US is usually the largest source of supply while being a Hong Kong based insurer, we'd like to look into the Asia Pacific region as well,” he added.
“Although Asian private credit is an asset class that we very much wanted to get into, the number of available strategies and managers, and also the opportunities, are still quite low, compared to the US but I do see growth potential in the region,” he noted.
He suggested investors should be “patient” and it's not something that the market can achieve overnight.
Phillip Titolo, head of direct private investments for MassMutual, a Massachusetts-based life insurance company that managed over $220 billion worth of assets as of end-2020 explained his firm’s approach to private investments during a separate panel discussion at the same event.
“Our team primarily invests in private assets, and that includes private equity, private real estate, and private debt. We have several billion invested in each of private equity and private high yield debt today, which includes middle-market senior secured debt,” he said.
"Given the large amount of fundraising the past few years, private equity managers now have over a trillion dollars of capital to deploy over the next five years. There's more dry powder chasing fewer deals in the market. That, in contrast, is well over the approximately $150 to $200 billion of dry powder for middle market debt providers. So, there's a clear gap there in terms of demand-capacity on the capital side,” he added, noting that private equity investors will find their financing under more pressure in certain cases.
He also echoed Ying’s views on the maturity journey of Asia private debt investment.
“Pan-Asia’s private lending is still developing there, and I think there's a lot to do there. I've called it a national bias, but I think a lot of US-based institutional investors are still learning about the asset class in non-US geographies, such as the different areas to invest within Asia and what the pros and cons are versus US-based direct lending. Asian private debt is still in early stages and so is their life cycle of using efficient debt for corporate purposes,” he said.
This article has been edited to clarify that MassMutual manages $220 billion worth of assets and that BOC Life is gravitating towards mezzanine-type and unitranche strategies.