By Neil Synnott, Chief Commercial Officer, APAC and Clare Chang, Managing Director, Greater China
Across the globe, private debt is experiencing a surge in popularity. This alternative asset class, offering attractive returns and diversification benefits, is rapidly becoming the “hottest” option for alternative investments. According to the International Monetary Fund (IMF), the private credit market, in which specialised non-bank financial institutions such as investment funds lend to corporate borrowers, topped $2.1 trillion globally last year in assets and committed capital. This resilient private asset class also boasts a 10% compound annual growth rate over the past decade, and the global private debt market is expected to reach a staggering $3.5 trillion by 2028. In this global landscape, Asia is experiencing its fair share of similar growth dynamics. According to IMF and Preqin Pro, data from 2023 indicated that Asia’s allocation to private credit remains under-represented. While Asia contributed 36 percent to global GDP, the region comprises only 7% of global private credit assets under management. This implies that Asia’s private credit market has significant growth potential.
Beyond tradition: allure of the private debt market in Asia
The Asia private credit industry has the potential to grow as an appealing market for investors seeking high returns. According to a recent survey conducted by alternative asset manager Coller Capital among more than 100 private markets investors, 72% of respondents wanted to increase their private credit holdings in Asia. The report also states that India and Southeast Asia are seen as the most attractive markets for buyout opportunities in Asia.
Private debt is generally accepted to refer to debt (i) provided by non-banks, (ii) not offered publicly and (iii) that is unlisted. Its strength is its diversity of strategies and transactions. Its longevity is due to its flexibility and how it can be reinvented for new financing opportunities. The recent growth of private debt arises from an undersupply in bank lending coupled with the evolution of nonbank financial intermediaries.
Here’s a breakdown of the key factors:
1. Filling the gap left by traditional financing
2. Demand for financing
3. Tailored solutions for businesses
4. Support from structural reforms
With growth comes challenges – navigate regulatory crossroads
The private credit market in Asia is experiencing a surge in growth, driven by the region’s robust economic activities. However, alongside these exciting opportunities lie significant challenges that the IMF urges authorities to consider a more intrusive supervisory and regulatory approach to private credit funds, their institutional investors, and leverage providers, to ensure sustainable growth.
1. Transparency and standardisation
2. Strengthening credit reporting systems
3. Mitigating risks from uneven growth and economic slowdown
4. Regulatory compliance as a cornerstone
Outlook for 2024 and beyond
Despite challenges, the outlook for the private debt market remains positive. Over the years, private credit has matured as an asset class in Asia and become a permanent part of the financing environment. The lack of alternative financing mechanisms, as stated in a 2024 report of Private Debt Investor (PDI), makes private credit a critical driver of growth in the region. Low loss ratios are opening up the door for investors and Limited Partners to gain access to an asset class that has excellent risk-return dynamics.
The growth of non-financial sector in the current financial environment, where interest rates are high, will also help the private credit to flourish. According to 2024 PDI report, higher interest rates suggest a positive outlook for the global economy, which will benefit Asia’s position as a hub for global manufacturing. Such an environment should be favourable for private credit to perform.
The IMF’s 2024 Report on Global Financial Stability states that an increasing number of mature companies are seeking funding in Asia for acquisitions and diversification of their creditor base, while long-term investors, such as pension funds and wealth managers, are drawn to potentially attractive yields. In recent years, several international alternative asset managers have launched Asia-focused funds.
Regional regulators and tax authorities have also become aware of the potential of this asset class. It is possible that there will be targeted regulations or tax exemptions in the near future. The Singapore government acknowledges the private debt market’s potential as a growth driver, particularly with a cautious banking sector. It is committed to supporting private credit managers in their Asian expansion and building an ecosystem to promote responsible investment practices and mitigate risks. On the other hand, the Hong Kong government is considering new tax rules that would treat the private credit business more favourably.
Looking ahead, we expect continued growth and evolution within the private debt market in 2024 and beyond. With careful navigation and strategic partnerships, investors can harness its full potential in emerging opportunities.
How IQ-EQ can help
IQ-EQ provides a comprehensive range of solutions for alternative investment businesses including due diligence, risk assessment, regulatory compliance, etc. to help manage all challenges associated with private credit. If you’d like to find out more about the support available from IQ-EQ’s expert team, please get in touch.
