CPP Investments, the investment arm of the Canada Pension Plan, expects increased activity in private credit markets across the Asia Pacific in 2024.
Raymond Chan, managing director and head of Asia Pacific credit at CPP Investments, pointed out that an estimated two-thirds to 80% of private credit in Asia used to be run by bank financing.
With changes taking place in the financing sector across the region, the market is shifting and offering opportunities for private credit investors, Chan explained at the Asia Private Equity Forum hosted by the Hong Kong Venture Capital and Private Equity Association on January 26.
“The retrenchment is happening across this region and in the US, but I think Asia in particular because the reliance on bank financing is huge. This is a very good opportunity for private credit investors to fill up the gap,” he said.
Across private equity and private debt, CPP Investments sees rising activity in the region this year.
“We will expect private equity activity to increase, people are especially very keen on Australia, India, and Japan. I think we will see a lot of increase in those markets,” Chan said.
He pointed out that last year was not particularly busy for private credit in the Asia Pacific.
A widened discount margin affected the Asia credit market, a type of yield-spread calculation designed to estimate the average expected return of a variable-rate security, usually a bond. This made the public credit market more attractive and in demand.
“But I think the trend has started to reverse because there is a very strong yield compression starting from around two months ago. The interest will swing back to Asia because of the yield compression,” Chan said.
China is currently facing concerns as a financial market, on the private side as well as the public side. However, Chan suggested that China is hard to ignore.
“Being a global investor, China is the second-largest economy. We remain active and have done investments in China in the past few years. We see a lot of opportunities that are quite unique,” Chan said.
He emphasized that CPP Investments sets a very high bar for China investments because of uncertainty in the Chinese economy and its financial markets, and because of macroeconomic changes.
“Every transaction is more tailormade for the situation and bespoke,” Chan said. “For us, it really boils down to the assessment of the risk.”
CPP Investments uses its established network in China and partners in the market to help risk assessment, according to Chan. While the Canadian asset owner relies on legal professionals to make sure that there is very tight documentation, partnerships are vital in the Chinese market.
“It is more important for us with a good network of experienced counterparties or partners who can help us assess the risk, because once you step into the wrong transactions, it doesn’t matter how robust the documentation is – it will be painful,” Chan said.