Institutional investors including Australian super funds are allocating more money to private credit strategies in Asia as the region’s banks have dialled back lending to the middle market in favour of larger companies.
Intermediate Capital Group, which oversees 42.6 billion euros (A$73.8 billion), said the same bank dynamics which had propelled the popularity of direct lending in Europe and the US, were starting to play out in Asia. Portfolio manager Wooseok Jun said that while Asian banks did not have the same capital constraints as those in the northern hemisphere, they were less motivated to lend to smaller and medium-sized companies, or SMEs.
“While they haven’t pulled back from lending as many of the banks in the US and Europe have done, local banks are focused on larger household sponsors,” Jun told delegates at Investment Magazine’s Private Credit Forum in Melbourne. “There are a lot of fast growing companies in Asia that need growth capital, so there is definitely a limitation.”
While a recent McKinsey & Co. report showed general private market fundraising in Asia had slowed for a second year in 2019, falling by almost $40 billion or 25 percent year-on-year, private debt had bucked the trend. The report showed that the asset class climbed 23 per cent last year in the region, as investors searched for new sources of yield and traditional lenders “struggle” to keep up with rising demand.
Jun told the roomful of consultants and asset owners that direct lending to SMEs was the “sector that possesses the most market opportunity for private debt in developed Asia.”
“Private credit is not well known and the market hasn’t been that well developed in Asia,” he said. “But there is no reason why private debt as capital for business owners should be in anyway inferior or less favourable than equity.”
A recent study by research provider Acuris found that 55 per cent of SMEs in Asia preferred using private credit to help drive growth versus private equity. “For growth capital and where the key stakeholder in the business wants to stay in and remain a buyer of the business, private debt is less threatening than equity,” Jun said.
For investors, the portfolio manager assured delegates that private credit was safer than equity and less volatile, adding that the standard deviation was less than one-third of an Asia buyout funds over the same vintage.
Jun also said that the leverage ratio for the middle market in Asia was “significantly lower” than that of Europe and the US. He added that excluding those in India and China, companies in developed Asia that were just starting to tap institutional capital for growth were doing so with little to no debt.
“There is a pocket of opportunities in the safer parts of Asia where the risk profile is significantly better then emerging returns,” the portfolio manager said. “There is a significant market opportunity for bespoke capital in Asia. There is a very high demand for this asset class, particularly from middle market companies.”