Asia’s private credit market remains largely insulated from the pressures building in the US, where lenders are increasingly grappling with the implications of AI disruption in software and SaaS-backed lending.
Unlike the US, Asia has relatively few software companies in the typical private credit borrower universe, industry executives said at DealStreetAsia’s inaugural Asia Private Equity Leadership Summit in Hong Kong during a panel titled ‘How private credit is shaping up in Asia‘.
The structural characteristics of the Asian market also offer lenders a degree of protection, they added.
Asia’s private credit market benefits from lenders being closer to underlying cash flows and collateral, with lower goodwill exposure across transactions.
Asia still has time to learn from developments unfolding in more mature private credit markets, as AI-related risks are becoming increasingly unavoidable globally. Going forward, the moat around software businesses will need to be examined much more carefully.
Managers should look beyond historical financial metrics and focus on the underlying drivers of a business, alongside its future prospects, according to Sharad Bajpai, Partner & Asia Chief Operating Officer of Ares Credit Group. That includes applying stress and sensitivity analyses to understand what could happen under different outcomes and how lenders would be protected.
Chris Wyke, Joint Chief Executive Officer of MA Financial Group, agreed that software lending is entering a period of significant change, due to changes in companies’ pricing models and the cost of delivering products.
“That is a very exciting and dynamic evolution,” he said, even as he noted that from a credit perspective, the idea of avoiding losers rather than picking winners could be difficult to price in.
Beyond software, however, private credit investors in Asia continue to see a broad and expanding opportunity set. Asset-backed financing remains one of the strongest themes, particularly across digital infrastructure and aviation. Some investors are also increasingly exploring more niche asset classes such as music royalty intellectual property.
Jacky Tian, Chief Investment Officer & Portfolio Manager at Flow Capital Partners, said he has spotted opportunities in real estate and construction-related sectors in Hong Kong.
“There has been a retrenchment of bank financing to the sector since the downfall of the Chinese real estate industry, and that has generated significant deal flow for us,” Tian said.
He added that Hong Kong’s position as a gateway between China and outbound M&A activity continues to drive financing demand. “We see a lot of companies coming into Hong Kong for financing and expansion overseas.”
When it comes to quality of deals, Diane Raposio, Partner and Head of Asia Credit & Markets at KKR, said attractive opportunities in Asia do not require investors to compromise. “Large companies are still seeking our capital,” she said, citing Samsung SDS as an example, referencing KKR’s recent $820-million investment in the South Korean company.
“I don’t think you have to go down the quality curve in order to be able to invest in credit in Asia,” she added.
Risk premium intact
Raposio added that the breadth of opportunities across the region supports the persistence of Asia’s credit risk premium. This “risk premium stain” – as she called it – could stay for at least another 10 years.
Raposio pointed to KKR’s activity spanning senior direct lending, junior debt, asset-backed finance and private investment-grade strategies as evidence of the market’s diversity.
“The world is decoupling, intra-Asia trade is growing, and that is just showing you the diversification that’s going on,” she said.
For Michael Hui, a Hong Kong-based Partner at Bain Capital’s Special Situations unit, Asia’s cross-market diversity also provides flexibility through cycles in a way few other regions can match.
Following the COVID lockdown period, Bain Capital’s special situations team stepped back from China, focusing on harvesting existing positions while rotating capital elsewhere.
“We managed to exit a lot of positions with profit, and focused on pivoting to Australia. That ability to pivot across different cycles and different economies just doesn’t exist if you focus on the US market,” he asserted.
The contrast with the US private credit market remains stark, said MA Financial’s Wyke.
Unlike the US, where the market has become saturated and competition has eroded lender protections, investors across Asia Pacific continue to benefit from more favourable deal dynamics.
MA Financial is focused on Australia, and even in this more mature private credit market compared to other Asian jurisdictions, Wyke believes that investors can get better terms and a solid deal flow.
The growing appetite of limited partners reflects that conviction. Raposio said KKR’s second Asia credit fund drew strong backing from both existing and new LPs.
“These LPs wanted the diversification. They’re sophisticated LPs with large private credit portfolios, and they understand the risk premium we can generate,” she said.
