‘Private debt could be Asia’s new frontier’

Preqin’s H1 2018 Investor Outlook report has found that 30% of the investors surveyed are of the view that Asia is the best place to invest in private debt. “Beyond the mature and competitive private debt markets in North America and Europe, credit markets in Asia offer a relatively untapped reserve of opportunity,” the survey notes.

According to the London-headquartered Preqin, a provider of alternative-assets investments data, institutional investors in 2018 are increasing their exposure to private debt strategies at a higher rate than ever before, with many looking to both diversify their private debt portfolios and find opportunities which offer less competition.

“The conditions are favourable for more attention to be paid to the region (Asia), and we may well see some consistent activity develop in the coming months,” says Tom Carr, head of private debt products at Preqin. Carr highlights that more than 900 institutions are now targeting investments in Asia, and almost a third of private debt investors think the region holds the best opportunities for 2018. “This may be in part a reaction to the consensus that markets in North America and Europe are approaching a pricing peak, and given the long time frames of private debt vehicles, there may be an expectation that opportunities in Asia will multiply in coming years,” Carr says.

And with the recent increase in investor interest in this area, private debt fund managers have seen increased fundraising success in recent years. According to Preqin, 2017 was a strong year for Asia-focused private debt fundraising, with 15 funds reaching a final close, raising a total of $6.4 billion in capital. The capital raised was the second-highest amount targeting the region to date and resulted in an average fund size of $427 million. “Asia-focused funds accounted for 9% of all private debt funds closed in 2017, three percentage points higher than in 2016,” Preqin says. “While still dwarfed by the North America and Europe, Asia-focused fundraising has carved out a significant niche in the global private debt market.”

According to data collated by Preqin, 60% of Asia-focused funds closed in 2017 met or exceeded their initial target size, including SSG Capital Partners IV, the second-largest Asia-focused fund to close in 2017, securing an aggregate $1.7 billion—26% more than its initial target. Marquee investors in the SSG fund—which targets high-grade private lending in Greater China, India and Indonesia—include California State Teachers’ Retirement System, San Francisco Employees’ Retirement System and Texas Permanent School Fund by the State Board of Education.

Preqin highlights that there are currently 31 Asia-focused private debt funds in market, seeking an aggregate $11 billion in capital. The majority (58%) employ a direct lending strategy, followed by distressed debt and special situations (13% each), mezzanine (10%) and venture debt (6%).

Interestingly, only three of the 10 largest Asia-focused funds follow a direct lending strategy, according to Preqin. This illustrates that direct lending vehicles in the region typically target smaller amounts of capital than funds such as distressed debt and special situations, which typically employ investment strategies that require larger-sized investments, Preqin explains.

While India is on the radar of SSG, Edelweiss Special Opportunities Fund II, with an India-focused direct lending strategy, raised $350 million in 2017. Piramal India Resurgent Fund, with a target size of $1 billion and focused on distressed debt strategy for India, is among the largest funds in the market as of May 2018.

Preqin says that with both the number of funds in the market and aggregate capital sought exceeding the number of funds that reached a final close and capital secured in 2016-18 (year-to-date), it would seem that fund managers expect institutional investor interest in the region to continue on an upward growth trajectory. And results from Preqin’s H1 2018 Investor Outlook corroborates its belief, as 30% of those investing in private debt are bullish on the opportunities in Asia. “While this is less than the 44% that named North America, considering the relative fundraising in the two regions over recent years it shows significant potential for growth in Asia,” says Preqin.

Back home, with non-performing assets mounting, the banking system may continue to be reticent about being on a lending overdrive. And, litigations and the likelihood of further slippages will bring up many more opportunities to buy distressed assets. As the Insolvency and Bankruptcy Code gets stronger, private debt lenders may be keener as the interest rates’ structure in India, and the current uptrend in interest rates, will make India a market too lucrative to avoid.