Private credit is coming of age in APAC as businesses look to alternative funding sources. We examine what’s driving this development.
Alternative asset managers around the world are looking at private credit as a potential generator of stable returns.
In our Future Private Capital CFO report, more than 15% of managers said they planned to move into private debt in the next 24 months. Of our mostly U.S.-based respondents, 17.5% also said they planned to expand their operations into Asia Pacific (APAC) in the same period.
It could be that many do both. As an asset class, private credit in APAC has been underserved compared with the U.S. and Europe. But that’s changing and private credit is becoming mainstream.
In this article, we’ll look at four factors behind this trend.
- Tighter lending conditions for small and medium-sized enterprises
APAC is weathering the same macroeconomic storms as the rest of the world, and banks are cautious about who they lend money to. This trend has been in motion since the financial crisis of 2008-9, after which regulations required banks to lower the level of debt exposure on their balance sheets.
Small and medium-sized enterprises (SMEs) are struggling to access traditional sources of finance. Globally, the OECD notes that “SMEs generally face higher interest rates, tighter borrowing terms and are more likely to be credit-rationed than large firms.”
Without significant collateral, many APAC-based SMEs struggle to access bank lending at all or can do so only at prohibitive cost. That’s left the door open for non-bank lenders to fill the gap.
With less regulatory requirements than banks and a more flexible approach to lending, private equity and venture capital firms have become prominent in the private credit space as they seek new investment opportunities. - A wealth of private credit opportunities in APAC
Private credit is a rapidly maturing asset class in the U.S. and Europe, but APAC is a few steps behind. That’s changing. In fact, the increasing competition among alternative investment funds in western economies is persuading more managers to look to APAC.
“We’re seeing significant interest in APAC,” says David Sarfas, managing director of CSC. “Those economies are in a development cycle, which creates opportunities for investors.”
Local private equity and venture capital managers are also seeing new opportunities in private credit as they seek to diversify portfolios and create more consistent cashflows. With SMEs making up 96% of Asian businesses, there are plenty of options. - A diverse region with diverse credit needs
Of course, APAC is a huge and diverse region, and different countries offer different kinds of opportunities.
For example, venture credit for early-stage companies is becoming increasingly common in India and Southeast Asia, as founders in tech companies and other sectors look to accelerate growth without selling equity. Loans are often provided by local venture capital funds or family offices.
The situation is very different in Australia, where national and international fund managers are attracted to opportunities in the country’s growing commercial real estate sector. Australian banks have pulled back from the sector, creating clear opportunities for non-bank lenders. - The growing maturity of the service provider ecosystem
Private credit and debt deals can often be highly bespoke, creating administrative complexity. Tailoring the loan for the specific circumstances of the borrower and lender is beneficial to both parties.
In addition, APAC is a region with a broad range of legal systems and regulatory obligations. Specialized local knowledge is crucial for both international credit funds, and local equity or venture capital firms looking to diversify into a new asset class.
Fortunately, the fund administration ecosystem in APAC is rapidly maturing, giving asset managers access to specialized expertise in the private credit space and the technology to efficiently manage and maintain credit and debt portfolios.
Singapore and Hong Kong are the region’s traditional centers of fund management, but there are also increasingly sophisticated alternatives in Australia, mainland China, and Japan.
For the complete picture, download our Future Private Capital CFO report.
Why CSC?
- CSC provides tailored administration and strategic outsourcing solutions to support the complex operations of alternative asset managers across jurisdictions and asset types, while adhering to global regulations and compliance.
- A market leader working with funds of all sizes, we’re the trusted partner of choice for 90% of the Fortune 500® and 70% of the PEI 300.
- Privately held since 1899, CSC is a global company with capabilities in more than 140 jurisdictions. We’re able to do business wherever our clients are by employing experts in every business we serve. We are the business behind business®. Learn more at cscgfm.com.