Asia’s $ 4 Billion Funding Gap Attracts Private Investors | Alternatives


Small and medium-sized businesses in Asia – which account for two-thirds of jobs in the region – faced an annual funding gap of $ 4.1 trillion last year, providing a great opportunity for investors willing to invest. lend in exchange for a return, but they also face several obstacles, according to a new study.

The Alternative Credit Council, which represents non-bank finance players in asset management, in its first report on private credit in Asia. The ACC interviewed 28 private credit asset managers in Asia and interviewed 15 of them on how they are addressing the challenges of investing in the region and the role that private credit can play in the rebound of the Covid-19 pandemic.

The report is “a roadmap for private credit investors in Asia,” said Lee Kher Sheng, Singapore-based co-head of Asia-Pacific and deputy managing director of government affairs at the Alternative Investment Management Association. (Aima), a subsidiary of ACC. He was speaking at a webinar on August 27 to launch the findings.

Lee Kher Sheng, Aima

The Asia-Pacific private credit market is much smaller and has grown more slowly than those in Europe and especially the United States, and for good reasons – including greater market fragmentation. Partly for this reason, beneficiaries often tend to view the region as an opportunistic private debt game rather than a central part of portfolios.

But the increasingly competitive global hunt for yield is sparking increased interest in Asian private credit markets and growing recognition of the potential opportunity there, among institutions such as the Public Officials Benefit Association of Korea.

FINANCING GAP

Driven by a growing middle class, Asia-Pacific’s GDP grew 4.5% last year, compared to 1.6% in Europe and 2% in North America, according to the International Monetary Fund.

As a result, the demand for business financing has increased. In 2009, there was $ 6.1 billion of dry powder and $ 6.3 billion of unrealized value of private credit assets under management in 2009; last year, those numbers had risen to $ 16.2 billion in dry powder and $ 40.6 billion in unrealized value. Globally, those numbers have risen from $ 475 billion to $ 812 billion according to alternative investment data provider Preqin Pro.

But more is needed.

“On the demand side, mid-sized businesses in the region face a significant funding gap. On the supply side, the region’s traditional capital providers are unable to bridge this gap due to a rigid financial ecosystem and a complex regulatory environment, ”said Jiffriy Chandra, Managing Partner and Chief Investment Officer of TransAsia Private Capital, cited in research.

Alexandre Shaik,

ADM Capital

Asia-Pacific accounts for about a third of global GDP, but receives less than 10% of the capital allocation for private lending strategies, according to the ACC report.

“From a macro perspective, private credit opportunities in Asia are greater than [those in] European or American markets. Public debt-to-GDP levels in Asia are healthier and, with few exceptions, Asian responses to Covid-19 have generally been stronger than in other regions, ”said Alexander Shaik, partner of the manager Hong Kong-based private credit facility ADM Capital.

In Asia, the financing of economic growth remains heavily dependent on national banking systems (see graph below), although this status quo is now being challenged, according to the ACC report. There is a growing awareness of the benefits of non-bank financing, especially with regard to its ability to provide flexible financing, he added.

In addition, global regulatory capital requirements for banks have restricted their flexibility in some markets.

REGIONAL BREAKDOWNS OF BANK FINANCING VERSUS PRIVATE FINANCING
(Click for full view)

Additionally, private debt investments have the added attraction for many of having a shorter duration – often measured in months rather than years – than some other alternative strategies, such as private equity and real estate.

OBSTACLES IN ASIA

However, investments in private debt are also problematic.

“Geographic fragmentation in Asia creates an obstacle to the expansion of private credit funds, unlike the United States, which is fairly homogeneous,” said one of the respondents in the survey.

Indeed, the private credit markets in Asia are less liquid than those in some other regions, which has led to a liquidity risk premium.

Remote locations, local language and cultural expectations make it more difficult for asset managers to assess risk in Asia. On top of that, many businesses are family owned, have limited accounting backgrounds, or may have complex ownership structures. Therefore, due diligence must be tailor-made, which leads to a perception of increased risk, according to the ACC report.

Fortunately, experienced and more established Asian private credit managers can on the whole generate higher returns than their Western counterparts, Shaik said, perhaps unsurprisingly. The report estimates that typical credit managers expect an annual performance of 13% to 20% over a period of three to seven years.

While the largest proportion of allocations in the region (41%) come from institutional investors, family offices (18%) and high net worth individuals (15%) are also leading allocators to Asian private credit managers. In Europe and the United States, by contrast, institutional investors generally represent the substantial majority of allocated capital.

Globally, 71% of allocations come from institutional investors and only 5% from family offices and 3% from high net worth individuals, according to an ACC report published in 2018.

Interestingly, most of the investment in Asian private credit comes from outside the region. Three quarters (77%) of the capital raised by private credit managers comes from non-Asian investors, especially North Americans (30%).


Carol M. Barragan

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