European asset owners are looking to scale up their private Asian credit allocations as they continue to diversify investment portfolios and income sources, experts told AsianInvestor.
“Mid-market credit, which provides downside-protected returns with the possibility of upside linked to the growing economy of India, is one such example.
"Focusing on impact and climate-related opportunities in Asia –is another example of a niche or specialised investment profile in Asia”, Kanchan Jain CEO and head of BPEA Credit, told AsianInvestor.
European investors considering Asian private credit tend to favour strategies that focus on the lower to core middle market because those are segments underserved by traditional bank lending and there is generally less competition compared to other segments of the credit market, other experts said.
“They tend to like more developed markets in Asia but are open to having some limited exposure to more developing markets in the region as they see that the legal and regulatory environment is evolving,” said Andrew Tan, APAC CEO for Muzinich & Co.
Returns also are attractive, usually in the teens, he noted.
STILL IN DEMAND
Asia remains the world’s fastest-growing credit market. Private credit fundraising in the region has soared over the past few years, hitting a record high in 2022 with $11.2 billion raised across 27 funds – a 42% increase over 2021, according to Global Private Capital Association report released in March.
Of course, Asia is not a homogenous market. “Markets such as Australia, Singapore, Hong Kong and South Korea are more creditor-friendly, while developing markets are less creditor-friendly,” said Kerrine Koh, head of Southeast Asia at Hamilton Lane.
The increase in private credit transaction volumes in 2022 was mainly driven by India and Southeast Asia. Distressed and non-performing loan opportunities accounted for many of the largest disclosed transactions, according to GPCA.
Over the past five years, India attracted the largest private credit investments by volume – about $9.5 billion – among all Asian markets.
European institutional investors such as pension funds and insurance companies are quite familiar with private credit as an asset class, and like it because it has downside protection, and stable contractual cash flows with low volatility.
“While asset owners are looking at disruption-related opportunities, they are aware of slowdown and inflation-related headwinds”, said BPEA Credit’s Jain.
“Asset owners that have used leverage to boost returns, whether for real assets or equity investments, are acutely aware of this. One way to counter this is to look at strategies that provide liquidity or regular income, auguring well for private credit.”
Most experts said that institutional investors, such as pension funds and insurers, are continuing to scale up allocations.
CAUTIOUS YET OPTIMISTIC
The big challenge investors face is potentially higher default risks given the looming recession in both the US and Europe, according to Hamilton Lane’s Koh.
“Investors are solving this by moving up the capital structure within private credit, by moving into senior secured credit, which offers a better balance between risk and returns.”
Lenders also need to proactively monitor borrowers’ financials to uncover potential issues beyond formal covenants.
Covenants are requirements written into bond agreements to ensure borrowers meet certain financial measures and in extreme cases, give lenders the right to seize the business.
European asset owners are not the only ones interested in Asian private credit.
About 68% of institutions in Asia Pacific plan to increase allocations to private credit, according to BlackRock's global private markets survey 2023 released in April.
The survey covered more than 200 global institutions managing over $15 trillion in assets under management and included pension funds, family offices, insurers, family offices and sovereign wealth funds.
BlackRock's findings are similar to what Asian asset owners have told AsianInvestor in recent months.
Nan Fung Trinity, the family office of Hong Kong business conglomerate Nan Fung Group, for instance, told AsianInvestor it plans to add positions in the private credit and distressed credit space, especially through secondary deals, amid rising interest rates.
The family office also plans to increase allocations to private markets this year.