KWM Series on Asia Private Capital Investment
Our private capital team has seen a rise in investment opportunities and foreign investor interest across South and South East Asia.
We previously shared insights on the opportunities in Indonesia.
Here, we examine the growth in private credit flowing into Asia and the secret sauce to getting a deal done.
Asia attracting private credit – have we reached the tipping point?
Private debt is expected to reach US$2.3 trillion globally in assets under management by 2027.[1]
Graph 1: AUM of funds primarily involved in private debt direct lending has grown tenfold in the past decade
Asia is well placed to get a large slice of the pie. Asia private credit assets under management more than doubled between December 2014 and June 2019 to circa US$57b[2], with the larger private credit fund managers such as KKR, Apollo and Blackstone all[3] announcing substantial allocations to their Asia credit strategies in recent times.
Graph 2: Global quarterly private debt fundraising Q1 2017- Q2 2022
This signals a shifting dynamic in favour of primary dealmaking in Asia. Historically, the Asia market had less need for private credit when lending rates were low and liquidity relatively free in the region. While funds have been active in Asia for some time, the combination of:
- the strength of some of the local banking markets (both in terms of depth of liquidity and competitive pricing), and
- borrowers and sponsors who have not been prepared to pay a premium for more flexible terms,
has meant that earlier investments focussed more on riskier ‘special situations’ investments and secondary trades.
Private credit investors are now stepping in, with:
- tightening credit markets, local and international banks across the region have less capacity and reduced appetite for riskier transactions and non-blue chip borrowers
- increased private equity allocations in the region from global sponsors who expect more flexible terms in their debt documents and are prepared to pay for them
- market dislocation making traditional equity structures harder to execute, and
- increasing awareness of private credit and sophistication on the part of borrowers in the region.
"We’re seeing investors looking for higher downside protection, as well as stronger risk-adjusted returns in this higher inflation environment.” Nicola Yeomans, KWM Co-head Private Capital
How to get it right in Asia
Whilst the opportunities for private credit in Asia are vast, there are inherent challenges to dealmaking in Asia. The market is fragmented, with each jurisdiction having a different legal regime creating complexity for non-bank lending regimes, enforcement of security and repatriation of proceeds. Getting the money in and out of each country in Asia needs to be carefully managed.
Getting deals done in Asia requires leaning into the complexity and being open to creative structuring and solutions.
Image: Strategic key to successful investment in Asia
