Private credit in Asia

Asia’s private credit markets continues to clinch a sweet spot for investors hunting for yield and companies needing more-nuanced and bespoke borrowing solutions. This has seen Asia-focused private debt assets under management grow at an average rate of 29% over the past five years , standing at US$78 billion as of December 2021¹. Just last year, a slew of international investors announced Asia-specific funds to tap the market including Bain Capital², Apollo Global³ and KKR⁴.

According to a 2023 BlackRock Global Private Markets survey released in April, some 68% of the over 200 global institutions surveyed in the Asia-Pacific region plan to increase their allocations to private credit this year⁵.

While Asia’s private credit market has already grown by leaps and bounds, fuelled by the region’s growth rate many feel the nascent market has barely scratched the surface.
“Traditionally, many international investors have not included Asia in their portfolios,” says Andrew Tan, Muzinich & Co. CEO of Asia Pacific and Head of Asia Pacific Private Debt Strategy “But Asia will be the world’s growth engine, which investors can’t ignore any further.”

Private credit, as the name suggests, typically comprises privately-negotiated loans or bonds that are not traded on the public market and not marked-to-market.

This complements the other financing products available – equity, syndicated loans and bonds – to meet borrowers' specific needs and goals.

Private credit or syndicated loans appeal to borrowers as they can stay out of the limelight of public markets and are able to negotiate financing directly, while diversifying their investor base.

Because private credit is not traded publicly, it is less liquid than regular stocks and bonds and not as easy to sell to another investor. The deals are more distinct. Typically, private credit is also not rated by credit rating agencies and issues are secured by assets or collateral.

For investors, private markets are broad enough to meet investors’ differing needs across time horizons, through market and economic cycles. Returns in Asia typically range from high single digits to the mid-teens dependent on jurisdiction, collateral and whether private equity sponsors are involved.

Banks, such as HSBC, play a unique role in bringing borrowers and lenders together, offering greater opportunities and choice to both sides.

HSBC’s strong footprint in the region, structuring ability and access to a broad range of investors means that it is well placed to fill clients’ needs.

“Private credit is a very meaningful product that’s essentially mutually beneficial,” says Bo Hu, Head of Private Credit Asia at HSBC. “Due to the banks’ connections and client base, we are able to introduce funds and clients as well as arrange and structure the deals, which plays to everyone’s strengths.”

Asia is a bright spot in a slowing global economy, accounting for more than half the world’s population, with the region’s growth expected to accelerate to 4.0% this year, according to HSBC Global Research. This compares to 2.3% in the U.S and 0.5% in the Eurozone⁶.

Celia Yan, Head of Asia Pacific Private Credit at BlackRock Alternatives, expects to see more deals from China on the horizon.

“The pandemic has been difficult for a lot of sectors in China and with the reopening each industry will have its own survivors that have proved their resilience,” says Yan.

Meanwhile, in India, BlackRock’s Yan says she expects to see more from growth financing sectors such as from the technology and consumer sector. Due to the asset-light nature of many of these technology companies, these deals typically feature more equity upside such as loans with warrants, PIK structures or convertible bonds.

“Technology, real estate, education, supply chain development and renewable energy projects have been the big trends in Asia at the moment,” says Hu. At the moment, we mainly see companies pursuing private credit financing for event-driven acquisition financing needs or to bridge the challenging operating environment coming out of COVID as consumption and investment behaviour take time to normalise post pandemic.

One example is Hong Kong’s Vobile Group, which provides software-as-a-service for online video content, The company secured more than US$127 million for its proposed acquisition of China’s Particle Culture Technology in April last year⁷.

Solely-led by HSBC, the custom-made financing package comprised of a senior bilateral facility and private credit funds.

The ability for deals to be structured to include a portion of lower-cost bank debt can deliver an attractive blended price for borrowers.

One of the benefits of private credit is that borrowers often have close one-to-one discussions with their lenders which can allow dialogue to take place faster and under more flexible conditions.

“At the end of the day we are focused on making sure that if there is stress in the system that we are well covered on our security,” says Muzinich’s Tan.

As Asia continues its recovery post-pandemic, private credit provides a much-needed niche of secured financing.

In many ways, private credit can be seen as a valuable financing tool to complement the public debt markets, and a shock-absorber, adding to financial stability by diversifying credit away from the banks and public markets.