Allianz Global Investors is adopting a broader strategy to investing in private debt in Asia than it does in Europe as it chases mid-cap borrowers in five key markets in the region.
The investment management arm of global insurance group Allianz is relying on a two-pronged approach to target senior secured debt and mezzanine financing for privately held Asian companies with enterprise value of less than US$1bn and Ebitda ranging from US$15m to US$100m.
AllianzGI, which manages over US$70bn in alternative investments globally, including private credit and infrastructure debt and equity, believes Asian mid-cap companies are currently underserved because of regulatory pressures on traditional financiers such as banks.
The inefficient debt capital markets in the region also hinder access to credit for many smaller borrowers despite their strong fundamentals.
“We have created a platform that can speak to a range of borrowers and we are starting from where banks stop, and stopping where private equity begins,” said Sumit Bhandari, AllianzGI’s lead portfolio manager for Asia private credit.
“Over time that gives us the broadest funnel as far as origination and deal sourcing is concerned.”
The majority of AllianzGI’s private credit business in Asia will come from proprietary bilateral transactions and it will participate in a limited number of third-party distributed investments. It will rely on a buy-and-hold approach, and funds invested will initially come from its German parent.
AllianzGI is open to partnering with banks and other institutional investors for both senior secured deals as well as subordinated capital.
The fund’s private credit operations in Asia commenced late last year with Bhandari joining in November 2018. Prior to that, Bhandari had worked at Middle Eastern private equity firm The Abraaj Group and US investment giant BlackRock, handling private and illiquid credit.
The Singapore-based team comprises three other senior portfolio managers under Bhandari and will continue to hire selectively.
AllianzGI’s private credit strategy in Asia differs from its approach in the US and Europe, where it has been actively investing for a longer period. Through its direct lending strategy, the fund will invest in second-lien or subordinated debt at an operating company level or senior debt at holding companies.
AllianzGI is targeting returns in the mid-teens through its direct lending transactions and high single digits of up to 9% through its senior secured investments at the operating company level.
The private debt portfolio over time would largely comprise loans to companies rated Double B or lower that require capital for growth, acquisitions or refinancing. The fund will not lend for capital markets transactions such as IPOs or bridge-to-bond financings.
Bhandari declined to disclose the amount of capital available for investments in Asia, but said the average size of each loan could range from US$25m to US$60m with tenors of between three and seven years.
AllianzGI is aiming to generate 70% of its Asian private credit portfolio from five core countries: India, Australia, Singapore, Indonesia and Vietnam.
The fund considers India an attractive market because of the liquidity constraints, with non-banking financial companies under pressure and banks still dealing with bad debts.
“A lot of the opportunities right now are in the refinancing space, where several borrowers are looking to better align their cashflows with their liabilities,” Bhandari said.
The investment manager is also actively looking at the acquisition financing market in Australia and at growth opportunities in Vietnam as companies move their supply chains because of the US-China trade war.
In South-East Asia, the competition to deploy capital is heated, partly because of slower deal flow of leveraged loans this year compared to prior years as a result of the decline of outbound M&A activity from China, Bhandari said.
AllianzGI will prioritise lending to sectors that benefit from growing household demand, such as healthcare, education, food, housing, logistics and general industrials. The fund can lend in different currencies including US, Australian and New Zealand dollars, euros and Indian rupees.