The search for fresh opportunities outside of the more saturated markets of the United States and Europe has led global industry players to refocus on Asia-Pacific, now an emerging global hot-stop for private credit – aka non-bank lending.
Since emerging as an investment buzzword three years ago, private credit has continued to garner traction as capital markets have evolved and higher traditional bank lending has widened funding gaps in the lending market.
The latest data by PitchBook reveals that private credit assets under management (AUM) in Asia rose from virtually zero in 2000 to $62.3 billion in the first quarter of 2024.
Data also reveals that the pace of that expansion has accelerated in recent years, with AUM more than doubling from $34.3 billion in 2017 to over $62 billion last year.
According to Nicholas Cheng, head of the private markets group at Standard Chartered Global Private Bank, Asia is arguably emerging as a significant private credit growth hotbed.
“The growing funding gap, rapid economic growth, increased sophistication of borrowers, and evolving regulations make it fertile ground,” he said.
Due to evolving regulatory landscapes and global investors’ search for higher yields, more capital is finding its way into Asia’s still-nascent but fast-growing private credit markets.
For example, US-based Apollo Global Management was recently selected to manage Singapore’s $1 billion private credit fund, which is aimed at supporting high-growth local businesses.
Meanwhile, Asian private equity firm Hillhouse Investment is understood to be looking at deploying between $1 billion and $2 billion annually in Japan, as well as aiming to roughly double its headcount in the country.
While banks continue to dominate credit provisions in Asia far more than in Western markets — accounting for about 79% of lending compared with 54% in Europe and just 33% in the U.S. - investment firm KKR is witnessing a profound turnaround in these dynamics.
Based on KKR’s observations, private credit is stepping in to fill a widening funding gap, especially when it comes to mid-market companies.
″As these countries continue to develop, so too does the number of mid-sized companies that may have difficulties accessing traditional bank financing, opening the door for private credit to service this market,” said Kyle Walters, a private equity analyst at PitchBook.
Walters expects capital to progressively shift to Asia as Western markets continue to mature.
“As mature regions like the U.S. potentially start to cap out, you’ll see more PE and private credit managers looking at Asia as an opportunity.”
What’s also evident from the accelerated growth of private credit in Asia in recent years, adds JPMorgan, is that the market has put the region’s previous wave of high-yield public bond markets defaults behind it.
“Over the last three years, the public high-yield market [has] almost closed,” noted Serene Chen, a managing director at JPMorgan. “That accelerated the development of private credit in Asia, as companies still needed refinancing options.”
This has resulted in private credit funds stepping in with customised, complex financing solutions, often targeting companies locked out of traditional funding channels.
“Asia’s driving over 50% of world GDP growth, but public debt markets remain underdeveloped,” Chen added, highlighting a structural gap that private credit is increasingly filling.
Due to their strong economic growth and burgeoning middle classes, private credit veterans, India and Southeast Asia are drawing significant capital.
Meantime, while Singapore remains a key financial hub, Standard Chartered is also witnessing Indonesia and Vietnam becoming magnets for capital.
“Infrastructure has been a very big sector because in Asia, especially in emerging market Asia, you still need to build a lot of renewable energy, you still need to build toll roads and you need to build data centres,” noted JPMorgan.
While Asia’s credit markets are less mature and more fragmented than those in the U.S. or Europe and have a patchwork of jurisdictions - which presents risks for private credit investors – KKR sees a “significant trajectory” ahead for the private credit industry in Asia.
While the region accounts for nearly 60% of global gross domestic product growth, less than 5% of local financial assets are allocated to credit, compared with nearly 30% in Europe.
“This suggests a private credit market with room to grow by an estimated $700 billion,” KKR added.
