Why private credit's time has come in Asia

THE growth of the private credit market is fast becoming one of the most exciting stories in Australia's financial sector. It could also become one of its most successful exports.

Globally, private credit has emerged as an investment buzzword for 2022, as more investors turn to assets that offer some protection from inflation and rising interest rates.

In Asia-Pacific, Australia is leading the way - but the market is set to grow in Singapore and across the region, complementing traditional bank lending.

Australia's private debt market has grown from A$35 billion (S$35 billion) in assets under management in 2015 to A$109 billion in 2020, or around 10 per cent of the overall corporate and business lending market, EY showed.

The pace of fundraising shows there is more to come: AustralianSuper, Australia's largest pension fund, is aiming to triple its private debt investments to over A$15 billion in 3 years.

Queensland Investment Corp launched an Australian private credit strategy in January after adding a team of private debt specialists in 2021.

This influx of capital also benefits companies by offering a broader range of financing options, particularly for companies that are underserved by banks.

Many private credit deals are for borrowers that banks consider to be either too small or too risky. As such, most deals are agreed on a bilateral or club basis, and the industry frequently operates below the radar. And where institutional investors or funds appear on larger deals, they tend to support borrowers in challenging sectors or with lower credit ratings. In other words, private credit complements bank lending - rather than competes with it.

ASX-listed miner Stanmore Resources is one example. The company in January signed a US$625 million debt facility with a group of investors including Varde Partners, Canyon Capital Advisors and Farallon Capital Asia to help fund the acquisition of an Australian coal mine.

Deals of this size would typically go to the bank-driven syndicated loan market, but environmental policies preclude many traditional lenders from taking on exposure to the coal sector.

However, this alternative funding comes at a high cost: Stanmore is paying an interest rate of 11.5 per cent for its 5-year senior secured facility.

Institutional participation also helps develop the broader debt market. This, in turn, makes it easier to finance acquisitions and attracts more private equity money into the region. KKR, for instance, turned to the institutional Term Loan B market to help fund its A$3.1 billion purchase of a 55 per cent stake in Australian wealth manager Colonial First State last year.

The battle now brewing for control of AGL Energy - where a consortium led by Brookfield Asset Management has proposed a takeover that would delist the company and transform it into a renewable energy provider - is the latest example of the depth of Australia's private financing markets.

From Australia to Apac

Other markets in Asia-Pacific can learn from this experience. While banks remain the dominant providers of credit across the region, they cannot meet Asia's total funding needs themselves.

This funding gap is particularly apparent for smaller companies and threatens to become wider as regulatory oversight intensifies, the prospect of higher interest rates ripples through markets and banks become more selective as to who they will lend to.

In contrast, private credit funds raised a record US$195 billion globally in 2021, Preqin data showed.

Private credit remains a nascent asset class in Asia-Pacific, but it is growing quickly, more than doubling to US$59 billion in the 3 years to 2020, Preqin also showed.

The arrival of new money on this scale is understandably treated with suspicion. No one has forgotten the huge amounts of hot money that flowed out of the region in 1997-98, stoking the fires of the devastating Asian financial crisis.

And in the region's bank-dominated financial system, the term "private credit" conjures up images of shadowy loans from nefarious moneylenders.

Dismissing private debt funds as unwelcome visitors to the Asia-Pacific credit market would be a mistake, though.

Australia's experience shows that private credit funds gained market share when Australian banks reined in lending to the commercial sector in the wake of the global financial crisis. That same dynamic exists across Asia, where major banks have had to rethink their risk exposure in light of tighter regulatory capital requirements and under pressure from stakeholders.

Private credit funds, meanwhile, do not need to worry about depositors or quarterly shareholder reports, leaving them free to take on different kinds of credit risks that would be difficult for deposit-funded, publicly-listed banks.

There are signs that institutional investors are beginning to turn their attention to other markets in Apac.

In January, Indian ride hailing group Ola raised US$500 million from a Term Loan B, following a landmark US$660 million financing for hospitality firm OYO last July, the first from an Indian startup.

Ares SSG also closed a US$1.6 billion pan-Asian direct lending fund in July - the biggest of its kind so far. And Singapore's DBS is investing in Muzinich's first Asia-Pacific debt fund targeting special situations in mid-market companies.

Assuming this growth continues, we believe private credit can become a valuable source of capital for Asian businesses.

As more companies look to refocus on growth, access to funding - in all its forms - offers an important step in moving on from the Covid-19 pandemic.

The writer is CEO of Asia-Pacific Loan Market Association