The private credit market in Asia is continuing to grow, with investors eyeing opportunities across the region that has dealt fairly well with the Covid-19 pandemic. They are particularly in the large emerging economies of China and India, as the nations' local banks lose their appetite for risk and the shadow banking sector retreats.
Institutional investors had become increasingly interested in private debt even before the Covid-19 outbreak. Far from drying up, more opportunities are appearing as banks reduce lending outside their home markets.
In the last six months, institutions, such as South Korea’s Public Officials Benefit Association (Poba), Ontario Teachers’ Pension Plan and Canadian benefit pension plan Omers have committed funds into the sector. Separately Fidelity International and Schroders have made new hires to expand their private credit capabilities.
According to financial data provider Preqin, assets under management (AUM) held by Asia-focused private debt fund managers jumped from $28 billion in 2014 to $64 billion in 2019. And despite the pandemic, the AUM, as of June 2020, reached close to 2019’s level, at $64.1 billion.
CHINA AND INDIA
Nitish Agarwal, head of Orion Capital Asia, told AsianInvestor that China and India present some of the biggest private credit opportunities. The Singapore-based private credit investment manager focuses on direct lending in the region, and recently received an undisclosed amount of equity investment from Omers, according to a January statement.
“Pre-Covid in India, non-banking financial companies (NBFCs) were withdrawing from wholesale lending given the liquidity crunch there and focusing on retail and housing finance. The bankruptcy of NBFCs [in 2018] was a catalyst, and things went on a decline, then Covid accelerated that decline,” he noted. NBFCs' activities are also known as shadow banking because they aren't subject to regulatory oversight.
In India, a wide variety of sectors show promise, particularly for infrastructure, Argawal said.
“Historically, real estate has been a large part of private debt portfolios, but now exposure is more muted due to the current sluggishness in the sector," he said. "Infrastructure (renewable energy projects, toll roads) has seen a lot of interest of late from private debt.”
“China has come out quite well from Covid. There is good demand for capital, and growth is back to normal there,” he added. “Real estate is a large part of China’s economy and a sector in which local banks have limited incremental lending. The recent 'three red-line' framework for real estate lending in China is likely to further increase demand for private debt in this sector in China,” he said.
The three red lines refer to new limits China has put in place for property developers looking to refinance, namely liability-to-asset ratio, net gearing ratio, and cash-to-short-term debt ratios.
“The Chinese market to us is a very precious source of opportunities, and frankly, it is rare to find such a scalable market at this time, not only in terms of the sheer size and capacity of what they can offer but also the diversity and range of products,” said Liew at the webinar.
GIC, Singapore’s sovereign wealth fund, also sees potential in Asian credit markets. China and India have seen improvements in regulations and policymaking, Liew Tzu Mi, chief investment officer of fixed income, during the Milken Institute's 2020 Asia Summit’s ‘Credit Markets Outlook’ webinar in December.
GIC did not respond to AsianInvestor’s request for comments for this article.
As for India, GIC sees a positive long-term trend. “Credit investing in India involves two areas. One: the offshore market, which is more established, especially with the large companies and banks,” she said.
“The other area is the onshore market which we think will also provide a lot of interesting opportunities now that inflation risks are much lower and interest rates are much more stable in the country.”
SOUTHEAST ASIA AND AUSTRALIA
Agarwal also observed rising private debt investment in southeast Asia. A lot of private debt has gone into resource-heavy sectors such as oil and gas, mining and coal in Indonesia, where typical bank financing is limited. “But we don’t like these sectors because of its cyclical nature,” he said.
The sectors Orion does look at include consumer and services. “Those sectors are less cyclical and may or may not get bank funding. These could be education, healthcare, distribution companies or warehouse providers,” he said.
At Allianz Investment Management, Kulbhushan Kalia, head of private debt in Asia, regards Australia as “an exciting market”, notably its real estate market.
“There are good quality borrowers out there ready to pay a decent premium for the added flexibility of private credit. Real estate prices have been cooling off recently, but the LTVs (loan-to-value ratios) take care of that,” he said, adding that Australia had a strong legal system, which adds to the appeal.
Allianz Global Investors
However, the region’s heterogeneous market brings unique challenges.
“Asia is a very wide and varied geography. It's not one business cycle. It's not one credit cycle. It's not one legal jurisdiction,” said Sumit Bhandari, lead portfolio manager for Allianz Global Investors’ private credit strategy. “What works from a legal perspective in New York or London, will not work in Jakarta or another Asian city."
Generally, experts told AsianInvestor that covering Asian markets require intense human resource because each country has different regulatory requirements. The region’s diverse currencies also add to foreign exchange hedging cost.
“In Indonesia where the currency is volatile, hedging costs can be as high as 4%-6% per annum,” said Kalia. “The loans have to be priced in a way that the returns are reasonable net of hedging costs.
Despite the challenges, investors are finding it hard to ignore Asian opportunities. “Eight to nine years ago, it was all about ‘why should I do private debt in Asia?’. Now it is not about why, but about with whom I should put money,” Orion’s Agarwal said. “Institutional investors are now very keen and expecting to see significant growth in the medium term.”
At the same time, investor expectations have become more sophisticated. “It is no longer an investor sitting overseas saying 'I don’t know Asia, so I need to make a 20% return'. There is a lot more awareness and understanding of the market with pockets of low and high risk. If you have that understanding, you can differentiate returns,” he said.
According to JP Morgan Asset Management’s ‘2021 Long-Term Capital Market Assumptions’ report, the bank’s estimate for this year’s levered return for global private debt/direct lending is 6.8%.