Global private credit stalls in Asia
Euphoria for Asian private credit markets appears to have faded over the past two years as smaller-than-expected deals and strong competition from banks have constrained growth.
Total private credit assets under management in Asia declined 0.7% between December 2023 and June 2024 to US$85.5bn, according to data provider Preqin, marking 2024 as potentially the first calendar year that could register an annual decline since 2014. Private credit AUM in the region jumped 18.5% in 2021 and 9.5% in 2022, but rose only 2.2% in 2023.
The total is still a small fraction of the US$3trn global private credit AUM as of November, according to figures from the Alternative Credit Council, the private credit affiliate of the Alternative Investment Management Association.
The pace of growth for these strategies in Asia has been slower than many expected.
“Asia's private credit market is less developed due to fragmented regulations, varying risk profiles across countries, and currency risks. These factors make the region riskier, leading investors to remain cautious about opportunities in Asia,” said Patricia Tay, banking and capital markets leader for EY APAC financial services.
This is not for want of trying. For instance, the major US asset managers have all made big bets on Asian private credit. Apollo launched a US$1.25bn private credit strategy in Asia in June 2022. KKR raised two Asia-focused credit funds between 2022 and 2024 totalling nearly US$2bn.
Blackstone expanded its APAC private credit team in 2022, hiring Mark Glengarry as head of APAC private credit strategies and building its presence in Tokyo, Singapore and Hong Kong. Another 2022 hire, Roger Zhang, who came from Partners Group in Singapore, left for GGV Capital’s Granite Asia two years later.
Meanwhile, BlackRock’s private credit AUM in Asia has grown marginally since 2022 and remains less than 10% of the asset manager’s total versus 71% for North America, according to a chart seen by IFR.
Private credit experts said many global players came to Asia expecting to replicate what they did in the US.
“They found out the hard way that was not possible. They built up teams the last couple of years, went on very aggressive hiring sprees and then after that started cutting down on those teams,” a fund manager said.
Most deals in the region tend to be US$100m or less and the small sizes have been a challenge for the larger firms.
This year, Cladtek Holdings in March obtained US$60m in private credit financing from alternative asset manager Tikehau Capital and Singapore-based brokerage UOB-Kay Hian, while autonomous cleaning robot maker Gaussium and Firmus Metal Singapore, a unit of Australian data centre operator Firmus Technologies, are also looking for private credit financing.
“We are witnessing a surge in opportunities in our sweet spot in deals sub-US$100m, but deal sizes remain stable,” said Michel Lowy, co-founder and CEO of alternative asset manager SC Lowy. “The prevalence of smaller transactions is largely due to the fragmented nature of the Asian market."
SC Lowy has AUM of US$1.6bn, two-thirds of which is Asian private credit.
Competing with banks
When bigger deals arise, they tend to be led by banks active in private credit, such as Deutsche Bank, Standard Chartered or Barclays.
Deutsche Bank is helping Indian conglomerate Shapoorji Pallonji Group raise up to US$3.3bn in the domestic private credit market, while StanChart underwrote a US$1.25bn facility for Vedanta Resources in late 2023 before placing it with private credit funds.
Banks will play an even bigger role this year, EY’s Tay said. “As investors seek diversification in asset allocation, the risk-return profile of private credit becomes more attractive, especially in a lower interest rate environment. Banks, particularly private banks, will likely leverage partnerships to offer alternative solutions to their clients.”
Asset managers say competing with direct lending is difficult in Asia. For instance, cheaper bank funding has prompted some borrowers that previously tapped into private credit to refinance with bank loans.
J&T Global Express and Canadian International School had both previously tapped the private credit market, but last year raised cheaper bank loans.
EY’s Tay said growth for private credit is proving hardest where governments are keeping lending rates low, as in China, especially as low rates tend to go with subdued economic conditions.
“China’s current challenges have softened investors' appetite for Asia in the near term,” said Kher Sheng Lee, AIMA’s policy and regulatory initiatives lead in APAC. “Yet many view these headwinds as cyclical rather than structural [and we are] expecting sentiment to rebound as macro conditions stabilise.”
Additionally, Asia Pacific has been a tough market because the US has been the focus of capital investment. The high-rate environment has meant that absolute returns from deals in the US have been attractive.
“There is always the question of why come out to Asia for a slight pick-up when we can just do it in the US instead. A lot of capital has been sucked up by the US, making fundraising for APAC private debt challenging,” a private credit fund manager said.
SC Lowy's Michel Lowy agreed that fundraising was challenging, especially for niche players.
“But things are rapidly changing because US investors want to diversify. Local investor interest is also increasing, especially from Australia, Korea and India,” he said. “Asian investors are starting to wake up to the opportunity and they understand the region better than global investors.”