Private lending has become more prevalent in the public domain in Asia, with global players making a foray into a sector that has long been the realm of specialist managers in the region.
BlackRock is eyeing the sector, while KKR co-founder Henry Kravis, during a visit to Hong Kong last year, said the private equity firms was planning to build out its alternative credit business in Asia.
This is being fuelled by a thirst for capital by Asian businesses, and funded by a growing pool of investors attracted by lucrative returns.
“We’ve seen interest from our client base in the US,” says David Bridge, associate director at Pacific Alternative Asset Management Company, a fund of hedge funds firm.
“North American pensions are looking at it, and larger family offices,” says Bridge, in addition to some endowments.
The internal rate of return for private lending vehicles can range from 15-25%, with shorter lock-up periods than private equity, says Bridge.
Some comingled credit vehicles may have lock-ups of between two and three years, compared with up to 10 years for a private equity fund.
According to US investment consultant NEPC, its institutional client base has allocated about $625 million to funds that provide credit to small and medium-sized companies in the US, and $275 million for European direct lending vehicles.
By comparison, Asia is a nascent – but growing – market with a number of managers based in the region raising capital for credit strategies. They include hedge funds Double Haven, OCP Asia and Arkkan Capital.
“This type of strategy has very high barriers to entry,” notes Bridge. Originating and structuring deals requires specialised skill-sets and the due-diligence process is “very intensive”.
So it is the domain of seasoned Asian credit managers. Some have honed their skills at investment banks, which were major providers of financing to Asian businesses prior to the crisis.
A post-crisis retreat of banks has provided opportunities for credit specialists to provide private corporate financing which is in short supply, relative to market need.
This has helped push private lending yields in Asia past those of the US and Europe, which have returns of 7-10% and 10-12%, respectively.
Additionally, a crisis-era wave of corporate refinancing activity in 2009 would put five-year loan agreements at maturity this year.
Accessing capital via direct lending would help companies to pay off debt, while keeping capital on hand to spend on business growth, says Bob Partridge, Asia-Pacific private equity leader at Ernst & Young.
“Companies have become overleveraged and being able to fix their balance sheet allows them to get on with growth,” says Partridge. It enables capital to be invested in the company “instead of paying off debt”.
Taking part in Asian corporate growth is an attractive opportunity, according to BlackRock, and one that the firm has been looking at for the past year, says Joseph Pacini, head of its alternative investors strategy group, Asia Pacific.
Given the considerable sums of capital that they manage, BlackRock, KKR and other global firms would likely lend to large Asian corporations, such as family-owned conglomerates.
Regional players are largely in the mid-market space, which is robust, says Bridge at Paamco. Deal sizes range in the tens of millions of dollars, with two or three firms sometimes teaming up to provide capital through a so-called ‘club deal’.
While there have been no estimates as to the potential size of the Asian direct lending market, Bridge expressed a common sentiment in the industry: “The size of the opportunity set is huge.”
*A full version of this article appears in the February magazine edition of AsianInvestor.