By Sukanya Lal, Business Development Director
In recent years, the private credit market in Asia has witnessed extraordinary growth. According to Pitchbook, assets under management stood at $62.3 billion in early 2024, up from $34.3 billion in 2017 and virtually zero at the start of the millennium. So, what’s behind the remarkable rise of private credit in Asia? And how can fund managers capitalise on the growth of the asset class?
A funding gap has emerged in Asia
Historically, traditional banks have dominated credit markets in Asia, with non-bank lending accounting for less than 30% of the market. Today, however, these banks are pulling back from lending to businesses due to regulations introduced after the Global Financial Crisis of 2008/2009, which have resulted in increased capital requirements and stricter liquidity rules. This trend is creating a funding gap and a structural shift in the region’s credit markets. As Asia’s economy – which is now responsible for nearly 60% of global economic growth – continues to grow at pace, more companies are turning to non-bank lending for capital.
Private credit firms are seizing the opportunity, stepping in to fill the lending gap. These firms are developing sophisticated, bespoke financing solutions designed for businesses that are unable to access traditional funding. And they’re enjoying success. Given that they tend to be able to provide liquidity significantly faster than traditional banks, they’re an attractive option for companies, especially in the middle market, where quick access to capital for acquisitions and project financing is vital.
In terms of where the capital is flowing, recipients are varied. However, much of the capital is being directed towards growth markets. Naturally, the technology industry is a hot spot. Here, funds are providing capital for high-growth industries such as FinTech, e-commerce, software, and data centres. Infrastructure is another key area of investment, with capital being directed toward toll roads, airports, energy grids and renewable energy assets. Note that renewable energy infrastructure is one of the fastest-growing areas for private credit in Asia. Amid the global push for decarbonisation, there’s significant demand for financing to build out new energy infrastructure.
Looking ahead, the Asian private credit market appears to have plenty of room for growth. Because despite the fact that banks have pulled back from lending in recent years, they’re still providing the bulk of credit to businesses across the region today. According to Ares, banks are responsible for 77% of financing to businesses in Asia versus 20% in Europe and 12% in the United States. If the industry follows the same path as it has in the U.S. and Europe, we’re likely to see the private credit firms capture a larger share of the Asian lending landscape in the years ahead.
Investor demand is high
It’s worth pointing out that demand from investors is high. And it’s not just institutional investors that are entering the market. As the middle and affluent classes have expanded, the investor profile has changed. Today, a broad range of investors including institutions, family offices and high-net-worth individuals are looking to incorporate Asian private credit strategies into their portfolios.
Demand for the asset class is being driven by the search for higher yields, desire for portfolio diversification, and the quest to find assets that have a low correlation to traditional asset classes. Maturing western credit markets are also fuelling investor demand – markets in the U.S. and Europe are saturated and institutional investors from these regions are interested in exploring opportunities in Asia, especially in high-growth economies such as India, Indonesia and Vietnam.
Innovative structures for a diverse investor base
To cater to an increasingly diverse investor base, private credit firms are offering a range of innovative investment structures today. These include:
- Separately managed accounts (SMAs) – SMAs offer several advantages over traditional commingled funds including customisation, transparency and control, negotiable fees, and structural efficiency
- Evergreen funds – These open-ended structures don’t have a set maturity date but offer periodic liquidity options and are attractive to investors seeking flexibility without locking in capital for the long term
- Blended finance vehicles – Primarily used in renewable energy sectors, these vehicles combine different types of capital – typically public or philanthropic money with private sector investment – to de-risk and mobilise funding for projects that would not otherwise be commercially viable
- Real estate debt funds – These target opportunities in commercial and residential real estate, often with a focus on mezzanine or bridge financing
- Digital infrastructure strategies – These focus on the financing of data centres and related assets, driven by digital transformation and the rise of cloud computing in the region
By offering a range of different structures, private credit firms can meet the specific risk, return and liquidity needs of a wider variety of investors, from large pension and sovereign wealth funds to wealthy families.
Unlock your firm’s full potential with a strategic partner
To successfully be able to offer these kinds of structures, private credit firms require a robust fund administrator to support them. Look for an administrator that can offer:
- A diverse, experienced team – Managers should seek to partner with a team that has experience with complex structures, in-depth regulatory knowledge, and can keep pace with the evolving environment
- A broad range of services – Consider a provider that offers a comprehensive range of services, including fund administration, loan administration, compliance and reporting
- Cross-jurisdictional capabilities – Across jurisdictions, legal and regulatory environments can vary significantly so look for a partner that is able to provide support across multiple jurisdictions with a ‘hub-and-spoke’ model
- Advanced technology and innovative products – In today’s day and age, firms need a provider that can offer automated reporting tools, data analytics and bespoke platforms to visualise data in real time
- Strong internal controls – Although fund administration in the APAC region is unregulated, a robust internal control framework is paramount. The fund administrator acts as a regulated entity when servicing a regulated fund manager and ensures compliance with anti-money laundering (AML) and know-your-client (KYC) regulations. This protects fund managers from hefty fines and potential breaches
At IQ-EQ, we offer a full suite of services that directly address the complex needs of private credit firms, with a global team of experts and advanced technology platforms designed to help firms leverage the power of their data. To learn how IQ-EQ can support your private credit strategy in Asia, get in touch today.
