With the IPO, and especially growth equity, markets essentially shut down, 2022 has evolved into a challenging year for public markets, prompting investors to shift their favour to private capital ones.
Global private credit fundraising, according to a BlackRock report released in October 2022, is on track to reach US$208 billion, representing only a 3% decrease from last year’s record high. This would, if achieved, be the second-highest amount recorded in the last five years.
Direct lending continues to stand out, a global private debt report from US-based research firm PitchBook shows, accounting for more than a third of the capital raised in the first half of 2022. Other sub-segments of private debt, such as special situation and real estate debt funds, also garnered plenty of attention.
Rapid changes in the macroeconomic situation, characterized by rising interest rates, sluggish economic growth and surging inflation in many economies, have prompted more limited partners (LPs) to shift their allocations away from traditional fixed income toward private debt, according to the PitchBook report, due to the market’s higher liquidity and returns.
“Issuers might be interested in looking to private credit because private credit capital tends to be more flexible,” says Andrew Tan, managing director and head of Asia-Pacific private debt, at investment firm Muzinich, speaking during The Asset’s 17th Asia Bond Markets Summit in November.
The global private debt market, statistics from the BlackRock report show, is dominated by North America with a four-year average global share of 61%, followed by Europe with 29%, and Asia, only 7%. However, global investors are increasingly looking to private credit markets in the region.
“From our perspective, higher growth is much easier when you start from an even lower base and that’s really Asia, where we expect significant growth in our credit activities,” says Emmanuel Deblanc, global head of private markets at Allianz Global Investors.
Another private credit investment manager, who is based in Asia, predicts robust demand for private credit in the region over the next two years and that a lot of corporate debt will end up on the private debt side.
Apart from tightening liquidity in the public market, the demand in Asia is also due to the increasing customization of financing in the Asian market, for example, the building of equity kickers, which are difficult to operate in North America and Europe.
And, on the supply side, many large global institutional investors are taking more interest in Asia’s private debt market, especially in the region’s most attractive submarkets in Southeast Asian countries and India.
BlackRock, which did 166 private credit deals in Asia this year, states that it has seen a growing appetite for Southeast Asia opportunities. The asset manager, for example, led a landmark venture debt financing for an Indonesian digital travel and lifestyle platform in October to finance its product offering expansion that aims to tap into the tourism boom as Southeast Asia reopens post-Covid.
And India continues to be an attractive market because of its robust GDP growth rate – which is providing strong tailwinds to an economy that is less resource export-focused than other Southeast Asian nations or Australia, for example – and has multi-sector exposure and a balanced local economy that mitigates the risks of single industry disruption. However, there are still some regulatory restrictions that limit foreign investors access to local Indian markets.
Unfortunately, China, the region’s largest economy, seems less attractive to global investors due to the uncertainties of the pandemic and its related restrictions, and risks present in the heavily leveraged real estate sector. Although investors won’t give up on such a lucrative market, they will most likely reduce asset exposure there in the coming year.
Looking forward, China's central government, in early December, quicken the pace of its loosening of Covid restrictions. While the country's economic reopening will be volatile, monetary and fiscal stimulus will support growth until activity can recover in the second half of 2023, and into 2024, according to a report by Swiss private bank Lombard Odier.
Overall, under the current volatile market environment, global capital flows show a number of opportunities appearing in the private credit market. Private debt will accelerate at a compound annual growth rate of 17.4% from 2022 to 2026, investment data firm Preqin predicts, making it the second-largest private market asset class in 2023, with fundraising growth continuing to be driven by growing LP allocations.
