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Asset Owners Leverage Direct Lending in Asia


Institutional investors, including Australian super funds, are allocating more money to private credit strategies in Asia as banks in the region reduced their middle market lending in favor of large corporates.

Intermediate Capital Group, which oversees 42.6 billion euros (A$73.8 billion), said the same banking dynamic that propelled the popularity of direct lending in Europe and the United States was beginning to play out in Asia. Portfolio manager Wooseok Jun said that while Asian banks don’t have the same capital constraints as those in the northern hemisphere, they have less incentive to lend to small and medium-sized enterprises, or SMEs.

“Although they have not stopped lending like many banks in the United States and Europe have done, local banks are focusing on large household sponsors,” Jun told delegates at Investment magazine Private Credit Forum in Melbourne. “There are a lot of fast-growing companies in Asia that need growth capital, so there’s definitely a limit.”

While a recent McKinsey & Co report. showed that general private market fundraising in Asia slowed for a second year in 2019, falling nearly $40 billion or 25% year-on-year, private debt reversed trend . The report showed the asset class soared 23% last year in the region as investors sought new sources of yield and traditional lenders “struggled” to meet growing demand.

Jun told the room full of consultants and asset owners that direct SME lending was the “sector with the most market opportunity for private debt in developed Asia.”

“Private credit is not well known and the market is not very developed in Asia,” he said.But there’s no reason why private debt as capital for business owners should be inferior or less favorable than equity anyway.

A recent study by research provider Acuris found that 55% of SMEs in Asia preferred using private credit to drive growth over private equity. “For growth capital and when the key player in the business wants to stick around and stay a buyer of the business, private debt is less of a threat than equity,” Jun said.

For investors, the portfolio manager assured delegates that private credit was safer than equities and less volatile, adding that the standard deviation was less than a third of a buyout fund in Asia on the same vintage.

Jun also said the leverage ratio for the middle market in Asia was “significantly lower” than in Europe and the United States. He added that with the exception of those in India and China, companies in developed countries in Asia that were just beginning to tap into institutional capital for growth were doing so with little or no debt.

“There is a pocket of opportunity in the safer parts of Asia where the risk profile is significantly better than emerging yields,” the portfolio manager said. “There is a significant market opportunity for tailored capital in Asia. There is very strong demand for this asset class, especially from middle market companies.