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Asia Private Debt Set To Continue Growth Story

The private debt fundraising juggernaut continues apace. According to Preqin’s Q2 2020 Private Debt Quarterly Update, the number of funds in the market currently is at an all-time high, with 486 funds seeking $239bn in capital. Direct lending comprises 47% of these funds, and 43% of the overall capital target.

Private debt funds focused on Asia comprise a small fraction of these numbers. In Q2, only four Asia-focused private debt funds closed, with aggregate commitments of $1bn, says Preqin’s data. The region is set to provide a private debt boom over the coming years, however, according to Treabhor Mac Eochaidh, Head of Debt Services at MUFG Investor Services.

“I’m looking at it as the main growth region for the private debt asset class,” said Mac Eochaidh. “It has always been there, but it has just been very niche. However, the search for yield by investors everywhere means that we’re seeing a growth in demand for exposure to less efficient markets like you can find in Asia and managers are flocking to service that.”

Managers licking their lips at the opportunities that the Asia region presents for private debt run the gamut, according to Mac Eochaidh.

“The main players obviously are involved – the amount of their capital that they can pull in is huge,” he said. “But interestingly we’re seeing a lot of managers who are based in Singapore, who have previously focused on local opportunities, looking to places like India, for example.”

India presents a huge opportunity for private debt managers. S&P Global Ratings said in June in its COVID And Indian Banks: One Step Forward, Two Steps Back report that “we expect the nonperforming loans to shoot up to 13%-14% of total loans in the fiscal year ending March 31 2021, compared to an estimated 8.5% in the previous fiscal year”. More than 90% of these loans sit on Indian bank’s balance sheets, according to Mac Eochaidh, and he says that this is just one example of where the private debt industry in Asia could see an uptick in activity. Managers must be cautious, however.

“The amount of NPLs that they have on their books is a huge weight for Indian banks to be carrying,” he said. “But managers need to be cautious here. In developing markets like India, the legal frameworks are very different. They’re not necessarily like western economies with protections for both lender and borrower, although places like India are trying to open up their markets to foreign investors by reforming the regulatory landscape. But certainly, for those that can navigate this, it’s an example of an opportunity for private debt managers in the coming few years.”

The convoluted nature of investing in Asia from a regulatory and tax perspective, coupled with the ever-increasing focus from investors on operational due diligence, means that private debt managers need the infrastructure to support their investment plans; something that managers sometimes underestimate.

“One thing about loans is, because they are so bespoke and have unique terms, modelling them up is a process in its own right. For managers who invest in Asia, it’s twice the work because of the myriad of regulatory regimes. Many managers have the strategy and know what they want to do but they don’t always have the pipes and plumbing to actually do it. Managers should be looking at operational costs and business processes and asking fund administrators like MUFG where we can do more to help.”

The United States has had a private debt industry for decades, and Asia (and even Europe) is playing catch-up to a large extent. Mac Eochaidh says that aside from India, China should present opportunities, especially in distressed debt, due to rapid growth in its banking sector; real estate lending should also offer opportunities across the region. He also says that part of the reason for the small numbers in fund closings this year could be due to the impact of lockdowns on fundraising, pushing some of them into 2021. Overall, however, his bullish perspective on Asia is based on what he’s seeing.

“Asian banks are cutting back on risk because of capital requirements like Basel III. It’s similar to what we saw in Europe after the Global Financial Crisis,” he said. “That means lots of opportunities for private debt strategies to fill the gap. We’re seeing managers from everywhere – the West, Australia, Singapore, Hong Kong – all looking at the opportunities there. Asia is ripe for picking.”

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