Private credit investments in Asia may be in for a big takeoff.
What is driving the trend is increased financing needs of fast-growing Asian economies, market participants requiring bespoke solutions, limitations of traditional lenders driven by regulatory constraints, and a growing number of private equity investors seeking leverage beyond bank debt, according to Clive Kerner, Group CEO of debt financing specialist Clifford Capital Holdings (CCH).
From 2015 to 2019, Asia’s private credit assets under management (AUM) doubled from $32 billion to $64 billion, according to a report by Preqin. And, the ratio of private equity investment to private credit in Asia stood at around 20:1 by the end of 2019 compared to the corresponding ratio in North America and Europe of 5:1 and 3:1, respectively.
“As such, we believe that there is still substantial growth potential going forward for the Asia private credit space…it is still pretty small and very fragmented,” Kerner said.
Some of the areas that may be ripe to absorb private credit in Asia include infrastructure financing and opportunities arising out of supply chain disruptions on account of the US-China trade row amid the global pandemic.
CCH is looking at these opportunities supported by its strong capital position and dry powder. Through its three platforms – Clifford Capital Pte Ltd, Pierfront Capital and Bayfront Infrastructure Management – CCH expects to have $3 billion of assets on its balance sheet and under management by the end of this year.
In June 2020, CCH acquired a 50 per cent stake in Pierfront Capital from the Pierfront Capital Mezzanine Fund (PCMF), which is managed by Pierfront Capital, as earlier reported by DealStreetAsia. Meanwhile, Keppel Capital holds the other 50 per cent of Pierfront Capital. Both CCH and Keppel Capital are backed by Temasek Holdings.
In mid-September 2020, CCH received an investment of $95 million from the Asian Development Bank to support its plans of deepening its presence in the infrastructure financing space in Asia. CCH’s shareholders include Temasek Holdings, Prudential PLC, Sumitomo Mitsui Banking Corporation (SMBC), Standard Chartered, DBS Bank and Manulife Financial Corporation.
The ongoing trade war, and the supply chain disruptions that occurred at the height of the pandemic, highlighted the need to ensure that there isn’t an overdependence on a single source. “It has also prompted some countries to ensure a degree of self-reliance in respect of certain critical supplies such as food, personal protective equipment, medicine and others,” he added.
Countries such as Vietnam, Bangladesh, Malaysia and Taiwan will see fresh opportunities arising in logistics and manufacturing as multinational companies seek to diversify from China.
The COVID-19 pandemic has thrown open increased financing needs across healthcare and digital infrastructure such as data centres, subsea cables, 5G and fibre networks.
“The digital infrastructure is specifically needed to better support work-from-home and telecommuting arrangements that could become more prevalent going forward,” said Kerner.
Despite the huge growth potential of private credit and debt financing in Asia, several challenges threaten to drag the asset class.
The main obstacle comes from the very broad spectrum of countries from a credit perspective, ranging from the AAA market like Australia to frontier markets such as Myanmar [no confirmed credit rating from international agencies yet] and Mongolia [rated at B with a stable outlook by Fitch in May 2020]. Less robust regulatory and legal frameworks in several Asian countries further worsen the landscape for private debt activity.
Certainly, it is a big difference compared to the US or Europe. “That lack of standardisation possibly makes it harder,” Kerner said.
CCH operates across the debt capital structure including lending in less developed and emerging Asia countries. Through CCPL, it provides structured and project finance solutions, primarily in senior debt, to support Singapore-based companies that are looking to grow in overseas markets.
Through its private credit platform, Pierfront Capital, the firm operates across Asian markets. Its investments include hotel investment platform Lodgis in Vietnam; M Tower in Myanmar; among others. Bayfront Infrastructure sources senior secured Asian infrastructure loans from banks for projects across a broad range of developed and emerging markets for distributions to institutional investors.