Private credit in Asia: opportunity ahead?

Private credit has become a powerful alternative to traditional funding.

This once-niche product has gained momentum as a supportive option for companies not yet ready for the traditional bank loan or public bond markets. The result is a global industry that almost doubled in size to USD1.5 trillion between 2018 and 2022, and is expected to hit USD2.8 trillion by 2028.¹

Private credit neatly fits in the gaps between other forms of finance and can service small-to-medium sized companies and entrepreneurs with an appetite to borrow and grow.

Late last year under HSBC Innovation Banking, a USD33 million blended venture debt and private credit transaction was closed for Ampd Energy, a climate tech company that has developed mobile battery generation systems to replace fossil-fuel generators used to power construction.²

In April 2022, Hong Kong-listed Vobile Group, a software-as-a-service provider for online video content production, raised USD127 million for an acquisition³, comprising a senior bilateral facility provided by HSBC as well as private credit funds.

Both these tech industry borrowers have business models that appeal to private credit investors – giving us a glimpse of Asia’s potential future, in which both private credit and traditional bank loans complement one another. In doing so, they create more funding options for borrowers.

Private credit is also an alternative for those seeking capital but reluctant to dilute ownership or unable to meet the stringent requirements of bank lending. As a typically more flexible type of lending, it can be structured as convertible debt and venture debt, or take the form of loans with warrants, as well as payments in kind.

Asia represents considerable scope for growth: whereas in the US and Europe, banks provide only 20% and 12% respectively of syndicated leveraged loans, in Asia the bank market accounts for more than 70% of all lending⁴. Asia is experiencing world-leading momentum in wealth generation twinned with the rise of an entrepreneurial force across the region that both needs and expects rapid growth. This, in turn, creates an environment where investors can potentially demand double-digit yields from borrowers, attracting sophisticated investors like pension funds and insurance firms, as well as wealthy families and family offices.

The market conditions of the moment support private credit. Interest rates are high, bond investors show a preference for top-quality credits, banks are less keen on risky or non-vanilla exposures on their balance sheets, and public market access for emerging market borrowers has been curbed by volatility. In such an environment, borrowers need new funding sources, and investors seek alternative avenues for alpha.

There is scrutiny around the level of regulation and transparency in the private credit sector, leading to concerns that excessive and sometimes hidden corporate leverage brings risk. These concerns should not be ignored. But the ability to meet borrowers’ unique requirements – across structures including direct lending, buyout financing, mezzanine, second lien debt, preferred equity, distressed debt and special situations funding – makes the asset class essential to fill funding gaps.

The rise of private credit does not mean that banks will step out. However, capital-constraining regulations introduced after the 2008 global financial crisis mean banks can no longer put their balance sheet to work as they used to.

Banks can still support the segment with the right guardrails and within risk appetite. HSBC is well-placed with its global reach and scale, as well as its structuring ability and access to a broad gamut of clients, to grow its private credit business, offering borrowers an alternative funding tool. Private credit occupies a relatively small portion of HSBC’s strong balance sheet, but forms a meaningful complement to more mainstream methods of funding.

Last year’s launch of HSBC Innovation Banking⁵ is also expected to pave the way for more private credit deals through its focus on supporting cutting-edge companies in innovative sectors.

Ultimately private credit can help to close the funding gap and support the kind of up-and-coming companies that will drive economic growth and, in time, foster financial market resilience.

The emergence of the new economy has seen a rapid upswing in small and medium-sized businesses looking to grow but which do not qualify for standard bank loans. This is nowhere more important than in Asia, where micro, small and medium-sized enterprises (MSMEs) account for 96.6% of all enterprises and 55.8% of the workforce, according to the Asian Development Bank⁶, and where India alone boasts 111 unicorns worth almost USD350 billion⁷.

The growth of private credit is aligned with this Asia: one of vibrant growth powered by small but powerful engines, diverse both in its methods and its funding needs.