Asia Pacific’s private debt market appears primed for growth with an increasing number of global and regional investors eyeing a greater role as the region recovers from the worst effects of the Covid-19 pandemic.

The global situation is being mimicked throughout Asia, where the need to repair their balance sheets following the global financial crisis and respond to increased regulatory pressures have challenged banks' dominance of lending in recent years.

At the Asia Pacific Real Assets (Aprea) Leaders' Congress on Monday (November 22), the head of infrastructure at an Asian sovereign wealth fund said that institutional investors have been allocating more money to Asian infrastructure    “after they realise there is indeed a gap and needed product in the market.”

“We saw a noticeable gap between where the banks are lending out senior loans and where the equity is sitting across the world,” the person said. “We are quite specific and are not going to be competing with the banks on senior loans. We are actually looking at some investment grade credit for infrastructure.”

Institutional investors are trying to capitalise on the demand for infrastructure investment in the region, which the Asian Development Bank has estimated will reach $26 trillion by 2030.

“There are growing product offerings from various general partners in this space as well, not just the interest from the institutional investors, because the insurance companies have always participated in infrastructure loans, mostly on the senior side with growing interest on the junior side, but there are more infrastructure lenders out there today,” they added.

INDIA’S TOO PRIVATE MARKETS

The legal, regulatory and economic environments across different jurisdictions can be a great challenge for foreign institutional investors, in particular, looking to capitalise on Asia’s emerging markets.

For example, China's real estate credit market is highly dislocated, with the risk return dynamics difficult for foreign investors to grasp right due to the huge policy risks involved.

India’s private markets present their own set of challenges, but fund managers there are seizing the opportunity to create new investment products for institutional investors who want access.

At the same event, Srini Sriniwasan, managing director of Kotak Investment Advisors Limited, said the kind of roadblocks or barriers to entry for foreign capital in India mean his firm can provide a spectrum of investment opportunities.

Srini Sriniwasan,
Kotak Investment Advisory

“The rupee is not a convertible currency, it's not possible for foreign currency to just come into the country and start lending in dollars and generating returns in dollars,” said Sriniwasan

“If we look at the architecture of the credit market in India — 70% of the credit of India is still given out by government-owned banks. And most of the government-owned banks, on average today have a non-performing loan ratio of close to 12 to 14%. So they're effectively not providing credit.”

Sriniwasan said that the Reserve Bank of India, the central bank, seriously restricts the kinds of lending banks in India can do, particularly anything to do with real estate.

“Real estate credit for banks in India carries the highest risk weightage and they are outright banned from providing credit for land acquisition,” he said. “That provides an opportunity for third-party capital providers like us to fill in the gap that otherwise is not possible to pull through the other foreign markets.”

“Bond markets in India are still very nascent. They are opening up, but it's very early days. It’s a great opportunity for credit operators, but not easy for global players to just come in unless they set up feet on the ground, and have a good network of both origination and market intelligence.”