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Capitalising on private credit investments in Asia

Big shifts such as consolidations among asset managers will likely happen in the burgeoning private debt markets in Asia. How should global asset owners tap into the private credit boom?
Capitalising on private credit investments in Asia

Valerie Mantot, managing director for Asia Pacific at Apex Group, outlines the key changes taking place in the Asia private debt markets and offers insights on the best ways to capture opportunities in the asset class.

1. What are the most prominent trends in the private credit market in Asia?

The assets under management (AUM) in the private debt markets in Asia has been on the rise even though the number of investment managers has not increased as much. Most asset owners tend to turn to global private debt players with a pan-Asia strategy, prompting more investment managers to build out their Asia-based teams.

It’s worth noting that most global investment managers did not have the necessary talent in Asia Pacific (Apac) when they first ventured into the markets, but now they are hiring people on the ground or relocating staff to the region. This will be a big shift. The talent pool is becoming even more expensive because they are highly sought after.

Another trend is about local managers. There have not been many asset managers entering the private debt space, but this is expected to change in the next two to three years. Some of the local private equity real estate (PERE) managers are diversifying their strategies and looking at private debt.

Market harmonisation or consolidation will likely take place as well. The private credit sector in Asia is a relatively small market and extremely fragmented today. Some of these small local managers will likely join forces through joint venture arrangements or co-investments in order to compete against the global ones.

Lastly, there will be a new type of asset managers in this area - family offices. They are seen coming in and competing with traditional private debt managers in the PERE space. Apex Group would expect them to continue this push and start looking at private debt as an asset class.

2. Does Apex Group observe a rising interest among asset owners in the Asia private debt markets? What are their key concerns?

There is definitely a growing interest towards private debt among asset owners in Asia, but the interests tend to concentrate on the more developed or matured Asian countries, such as Australia, Japan, Singapore, South Korea, Hong Kong.

When investors think about private data as an asset class, legal risk is on top of their minds. Private debt is a type of debt, in which collateral and a certain level of security are required from an investment manager perspective, so the legal framework plays an extremely important role.

Unfortunately, the legal framework is quite fragmented across Apac countries. Some of them are still strengthening their legal frameworks and investor rights there are not optimal yet. Developed countries that have solid and credible legal frameworks are the ones that benefit the most as more asset owners pivot to the asset class.

Currency swing is another concern. Apac is a continent with many different local currencies and some of them fluctuate a lot. The lack of stability and predictability in these local currencies will have an indirect impact on investments in private debt in Apac.

3. How has the Covid-19 pandemic affected private debt investments in the region?

Some private debt managers are unable to exit their investments in the secondary markets during the pandemic. A manager may have launched a fund to invest in real estate before Covid-19, aiming to exit the investment during the coronavirus outbreak. But the plan fell through as valuations dropped significantly.

Faced with that situation, some of them set up private debt funds and used the real estate assets as collateral for private debt projects. In other words, they kept the first product and continued to rent out the office space, and at the same time leveraged the assets to launch another product in the private debt sector.

The Covid-19 pandemic also negatively impacted the managers’ fundraising capability, particularly local private managers in the less developed Apac countries. They have been struggling to convince global asset owners about their investment stories.

Nevertheless, asset managers in more developed countries in Apac who have embraced technology are able to conduct due diligence and employ advanced valuation methods, so they are less impacted by the travel restrictions during Covid-19.

4. What qualities in private credit managers do asset owners look for when they partner up with them?

Since private credit is a relatively new asset class in Asia, institutional investors will want to check if the managers can team up with recognised partners and professionals in Asia who can assist them throughout the entire investment journey.

Asset owners expect them to have a very strong team and maintain an extensive local network with various service providers, such as evaluation companies and auditors. This can help to identify the best local assets and maximise returns.

They are also increasingly looking for private credit managers who embrace technology and automate most of the investment processes. Robust performance, track records and transparency in fees are other requisites as well.

Asset owners prefer global private debt managers because most of them today have a pan-Asia strategy. They offer funds that have pan-Asian sub funds, while some even have dedicated private debt Asia funds.

5. In what ways does technological development accelerate private credit investments?

From fundraising to onboarding of investors, complying with different accounting, legal, regulatory or tax requirements, technology can help to facilitate the processes at different stages.

At the asset level, technology can help to track and evaluate the performance of assets, enabling asset managers to perform efficient due diligence on new assets. It can also be used to monitor the environmental, social and governance (ESG) impacts on assets.

The majority of the private credit managers who do not have the required technology capability in-house will choose to enlist the help of external players like Apex Group.

Apex Group offers bespoke technological solutions to asset managers and helps to implement the technology as part of the investment management process. A wide range of bespoke solutions are offered to private credit managers of different sizes, regardless of them being global or local.

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