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Private Debt in Asia

04 November 2020

IQ-EQ hosted a webinar with IFI Global, Morgan Lewis, PwC and Edelweiss Asset Management on Thursday 22 October, focused on ‘Private Debt in Asia’.

North America may be leading the region when it comes to private debt, but a number of key Asian LPs – such as Temasek and the Japan Government Pension Funds – are allocating capital to private funds. On the back of our exclusive white paper, ‘Private Debt: Expect the Unexpected’, which was launched by IQ-EQ in collaboration with IFI Global, this webinar session focuses on the key findings of the white paper from an Asian perspective.

The webinar starts with an introduction on the results and takeaways of the white paper by Simon Osborn, CEO of IFI Global, followed by a panel discussion and a live Q&A session.

The panel was moderated by Jimmy Leong, IQ-EQ’s Chief Commercial Officer for Asia. Our panellists comprised:

·       Sukanya Lal, Business Development Director, IQ-EQ

·       Joel Seow, Director, Morgan Lewis

·       Hermant Daga, President and Head, Edelweiss Asset Management

·       Anuj Kagalwala, Partner, Asset and Wealth Management Tax Leader, PwC Singapore.

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Transcript

Speaker name
Jimmy
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Hi everyone. Good afternoon and good morning, depending on where you are in the world, I'm Jimmy Leong, Chief commercial Officer for Asia at IQ-EQ. We are very delighted today to co-host this webinar with Morgan Lewis and Edelweiss asset management on private debt in Asia, and I'll be moderating the session. So, we're going to have some very interesting insights on the topic of private debt in Asia today, you might be aware that North America may be leading the field when it comes to private debt, but a number of Asian limited partners, LPs, such as Temasek or the Japanese government pension funds are allocating capital to private funds. On the back of our exclusive white paper on private debt, which is called “Expect the unexpected” launched by IQ-EQ in collaboration with IFI global, this session will focus on the key findings of the white paper from an Asian perspective. The webinar will last for one hour with an additional 15 minutes at the end of the session, a 15-minute live Q and A session. So, in terms of housekeeping, just to get started, if you have any questions during the presentation, please type that into the question box in your control panel on your right. I'll be very happy to raise them during the presentation. And we will also have time for questions at the end. I'm very delighted to be joined by our experts today, and it is my pleasure to welcome them. Simon Osborn, CEO of IFI Global. So, Simon is the Chief Executive Officer IFI Global Limited. In his capacity, he's responsible for IFI Global's research output and is Editor-in-chief of the NED, ADI and funddomiciles.com. Prior to launching IFI Global, he was an Associate Director of the International Herald Tribune (IHT) based in Paris, where he was responsible for the development of IHT’s asset management coverage. Before joining IHT, he was with HZI international, which is a media consultancy that specializes in advising and investing in business financial and medical publications in the developing world. So, Simon will be sharing with us today the key findings of the white paper on private debt, and some of the key trends that we are seeing particularly with regards to Asia. Our panel of experts today include Sukanya Lal, Business Development Director at IQ-EQ, Singapore. Sukanya is involved in business development and sales. She has over 15 years’ experience in financial services. She specializes in fund administration and related services and has experience in a wide range of unstructured investment strategies. Joel Seow, Investment Funds Partner at Morgan Lewis. Joel advises sponsors throughout Asia on the establishment of private investment funds across various asset classes and jurisdictions that have a focus on private equity, venture capital, real estate, infrastructure, and hedge funds. He also counsels on non-traditional private investment fund setups, including fund platform structures, hybrid funds, up deals and open-ended e-liquid funds among others. Joel is aware of Singapore's regulatory requirements for fund management and the offer of fund interests and regularly advisers international and local fund managers on their licensing and regulatory obligations, as well as assisting with the submission of fund management license applications to the Monetary Authority of Singapore (MAS). Hermant Daga President and Head of Edelweiss Asset Management. Hermant has close to one and a half decades of investing experience as a head of asset management business. He oversees the investments and distribution of funds across multiple platforms that includes mutual funds and alternatives, and has been instrumental in the scale up of the business or making any one of the leading alternatives managers in India. He joined Edelweiss in 2005 and has been instrumental in scaling the global markets business across sectors, asset classes and geographies. Additionally, he was also responsible for managing the Treasury at Edelweiss and overseeing all investment decisions for the organization. Anuj Kagalwala, Partner, Asset and Wealth Management Tax Leader, PwC Singapore and he will be joining us as the guest speaker today. Anuj has 22 years of experience in Singapore. He is actively involved in discussing asset management and wealth management issues with industry players, industry association and has a close working relationship with the authorities. He supports actively on policy matters affecting the asset and wealth management industry in Singapore, which has provided extensive advice to fund management players, family offices, and financial institutions on various areas, including the VCC, the variable capital company in Singapore and other fund structures, ETFs, restructuring, and investments setting up of Singapore investment funds and fund management operations, entry strategies in Singapore and Asia and treaty analysis. So now without any further ado, I would like to hand it over to Simon.

Speaker name
Simon
Spoken content

Thank you very much, Jimmy. Thanks for that introduction. What I'm going to do today is, share with you the, the main findings of the study and talk about some of the other areas we covered in the white paper that Jimmy just referred to. To start with, I'd like to say that it was a very interesting exercise, not something we do very often to come back to a study, a piece of research we did a few months ago and see whether the findings we made at that time, which was late spring and very early summer, are still valid today. Particularly, as the world is changing at such a ridiculously fast rate, thanks to the pandemic and having reviewed the findings for this presentation earlier in the week, I'm happy to report that I believe they are just as valid today as they were when we did the field work. The most important point of course by far is that the study was undertaken for IQ-EQ after the onset of the pandemic, which is obviously the most critical event of the year - perhaps the decade of goodness knows, perhaps even a longer than that. And, one of the conclusions of the survey is that COVID-19 will have a really substantial impact on the development for the market, for private debt across the world, quite possibly a greater impact on this particular asset class than at least any other alternative fund strategy. And that is primarily because, private debt, really focuses upon SMEs and middle market, companies, which have of course been in the front line in terms of being affected by the pandemic economic fallout. Now what I would like to do today is take you through the main results of the research that we did, which was both with investors and private debt managers, and then, touch upon market developments. So, I find Global’s research departments, are they private debt managers with a combined overall AUM of US $388 billion. We also surveyed some very large institutional allocators to private debt strategies who were based in Australia, Canada, the UK, and the US. We asked, to begin with three questions on how the private debt market will cover over the next three years. And given the fact that, we did it off to the onset of the pandemic, as I already stated, I think that's important to bear in mind. We asked to begin with, did people think the market will become more fragmented? That was a lot of the topic of conversation prior to the pandemic because of the growth so far up until March this year, people thought that there would be potentially significant changes because of that. So 38% said, yes, the markets will become more fragmented, but 62%, no, it will not. And then we asked, do you think there will be a drop-off in fundraising? Only 10% said there will be a drop in fundraising, whereas 90% said not. And 95%, the question do you think this market will continue to grow? 95% said they thought it would. And therefore just 5% said that they did not see that happening. Now, we also asked about bank lending and whether or not the return of bank lending to the SMEs and, and, and this particular area of the market was a positive or a negative? The private debt market and bear in mind, I’m sure everyone on this call today is very well aware of the fact that it was really the withdrawal of the banks, lending facility to these companies that really got the private debt market going from the banking crisis in 2008 onwards. And perhaps, partly to our surprise, to the question, is this, is the return of bank lending, to support these companies in this crisis positive or negative? 86% said that they thought it was positive it and therefore just 14% saw it as negative. So, this is perhaps the first time since the distraction really got going up, you might say that private debt has a competitor, private debt managers have a competitor in banks. Although many of them of course, would prove reluctantly to do what they did because of the Government. That certainly is the case here in the UK and I'm sure it's the case in many other countries as well. We also asked, will the crisis increase or decrease private debt correlation with other alternative asset classes? 46% thought it would increase it, but a small majority, 54%, thought it would actually decrease correlation. Now before the pandemic arrived, many forecasts that there would be, touched upon quite a significant wave of consolidation in the private debt market because of the very rapid growth over the last few years. And we asked whether or not, whether the private debt markets will consolidate as a result? 69% said, perhaps it will 31% said not. And we also asked which private debt strategies are expected to have the best risk and return characteristics over the next three years? And the order was as follows: probably to no one's surprise private debt was at the top of the list. That was the most popular, followed by special situations. And then, third was direct lending. Infrastructure debt and venture debt came in basically equal. And they were followed by mezzanine debt. And finally, at the bottom of the list, there was real estate debt. And I think the broad overall conclusion of the study is that the private debt market will continue to grow and the COVID-19 is not expected to have a serious negative impact upon this market's potential. Now turning to market developments in terms of as you all know, and I've already mentioned a couple of times, the private debt market was growing very strongly indeed up until the arrival of the pandemic, if the pandemic hadn't come along, it looked like assets globally would break through the US $1 trillion mark according to Preqin, which given that this asset class really only dates back to the 2008 financial crisis. This is quite extraordinary. According to Bloomberg these figures are big. I'm sure when I'm going to quote the Asia Pacific markets in a second, I'm sure because of the historical time lag, but nonetheless, these were the last figures we were able to get our hands on. According to Bloomberg, more than half the institutional investors investing in private debt are in North America - that's 56%. But the Asia Pacific region, as they said, it was growing quickly as it is, as it is also here in Europe. Europe has 25% of the world's institutional private debt investors. And the Asia Pacific region, when Bloomberg did this, only had 13%, but I wouldn't lay a very large bet if we were, if Bloomberg was doing this say next year to look back on 2020 or do the year after, I would very much expect them to. And I think they said it themselves, that there would be a significantly greater contribution to that from the Asia Pacific region. The reason incidentally for the US dominant is that distraction really began in the US, the private debt market was developed mainly as a result of launch US private equity houses with credit facilities such as KKR and Blackstone, there were others, but those were probably the two largest and but more recently established fund groups. And certainly, here in Europe, I think some to a certain sense of States have been getting in on the act as well. So very standard, well known from houses like MNG, Schroders, Moodys, Standard Life Aberdeen now have very active private debt departments, but still nonetheless, despite these regular fund houses getting in on it over 70% of investor capital for private debt strategies still comes for institutional investors. And I think the reason that the institutional investors, light the strategy so much is that it has, particularly low correlation with traditional asset classes. This is partly because it covers SMEs and mid-market companies that are otherwise difficult. So then, as institutional investors to reach, and also, I think another reason why it's usual investors have been dominating the market as much as they have is because there isn't yet a well-developed secondary market for private debt. So, investors often have to hold on to maturity that's that will come in this decade, particularly if we get past the pandemic, the development of a secondary market, which would then open it up in many different ways. Obviously, now as for the future, that's the past as for the future, of course, the prospects for all asset classes is bound up with what's going on in the wider economy. But I would say that that applies even more to private debt than probably to any other strategy that may probably even 20 other alternative century mainstream one too. So, if we do get a V-shaped recovery, then it is in my view. And I think this was one of the conclusions of the study and the, and the investors and managers. We, we surveyed, it's extremely likely that we will go comfortably past that trillion us dollar assets. And that will go on up as the decade progresses and then do this could be an extremely good decade for private debt given its risk return characteristics and no correlation with other asset classes, as I've already stated just to be negative for a second, if God help us, this pandemic goes on, for a great deal longer I think go from bad to worse. And it does trigger a really serious long-term recession, potentially even a depression. Then I think you can say that the private debt market should still do depending on of course what time horizon you're talking about. But the private debt market should still do better than equities. And, and, almost certainly many other asset classes as well, but a lot harder. But also on the rise, depending on what happens on the current economic environment. And that of course will depend upon the technology to overcome the pandemic. And I'm coming to you this morning, my time from just outside Oxford, I have some friends who are very good friends with members of the vaccine groups. I just mentioned to you in passing that they're very hopeful that their vaccine, I know there's, two other vaccines in the final stages of development they do are, they are hopeful that they've got funding, but it's going to take a long time to roll this out. And I know in the Asia Pacific region, you've also got some very positive looking vaccines as well, and they are equally tracking and tracing and there are some astonishing things coming along from that area too. So please let’s hope these things come through, then, you know, where it's going to be very good for the global economy will be very good for private debt. And it should be a very, a good decade for this particular strategy and on that note, I think I'll conclude my comments. And I'm going to, if I don't screw up here, get rid of my camera and listen to the rest of this conversation as an audience member. So over to you, Jimmy, thank you.

Speaker name
Jimmy
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Thank you, Simon, for sharing the insights and the trends in the private debt market. If anyone, if an audience would like a copy of the white paper, please feel free to reach out, we are more than happy to share that with you. So, I would now like to proceed to the panel discussion. So, let's get right into it with our very first question for Sukanya, and then for Joe and Anuj. And so, you know, if I can, I would like to start with Sukanya followed by Joe and Anuj. And so, the first question to Sukanya, our Asian, co-PI's looking to allocate capital to this asset class, because this is a question that we get asked all the time. So, so are Asian LPs looking to allocate capital to this asset class from what you've seen in market?

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Sukanya
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Thanks, Jimmy. And I think Simon has already laid it out very well. I think as the investors start looking at maximizing their yields and they start looking at diversifying the asset classes, yes, we are seeing more invested into it. We have seen an increase in the Asian private debt, which has more than doubled. We've also seen an increase in the number of private debt investors, domestically in Asia. This used to be around 115 investors and it has now grown to over 470 investors in the past five years. I think at the start of the 2020 itself, as per the latest report, we are seeing more than 35 Asia focused private debt funds in the market. Again, if I refer to the latest Preqin report of 2020, there is a survey that mentions that around 86% of the limited partners intend to allocate as much or more capital to private equity, including venture capital. And I would think that in this increasingly allocated institution in those alternative assets and underscores promising prospects for the industry.

Speaker name
Jimmy
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Thank you, Sue and Joe any comments on that?

Speaker name
Joel
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I think from what we're seeing in the market, I would generally agree with that view. I go as far as to say, I mean, the question itself is asking us whether Asian LPs are looking to allocate capital to this asset class? I think my response will be that we are allocating quite significantly to this asset class, if you, you know, there have been different surveys and research papers that have been conducted recently. Take anyone of them, I think if you take the average Asian private debt, private credit fund manager, it's not uncommon to see that, especially for the larger ones, at least about a third of the capital, the LPs set, we have actually Asian based LPs. So, I think as a starting point is fair to say that there is a good inactive involvement in the space really and the LPs are certainly looking at towards investing here and increasing their locations. I think there's another indicator for us, which is purely from the point of view of new managers. And I I've, I offer perspective from Singapore and in terms of licensing applications and requests that we get, we certainly see that there are no new managers. So, they are setting up the business in Singapore who are now characterizing or defining themselves as having a specialty or expertise in private debt as well. That to me is a strong indication, of the strong interest again and also reflection of the growing body of expertise and depth knowledge that we have here running off simple. So, it's a fairly consistent view of, you know, it's all, it's all looking good. It's very positive space in Asia. The question leads on, on COVID-19. So, we can comment on that later, but overall it's positive from my point of view.

Speaker name
Jimmy
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Thanks, Joe. And Anuj, so are also seeing the same kind of trends?

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Anuj
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Yes, that's right. Yeah. So, I mean, several years ago we used to see US and European managers setting up credit funds. Now we are obviously seeing our regional and local fundraising in this space, you know, and I think there's a couple of observations that we have to emphasize on. Sukanya also mentioned about the returns on strategies. I think healthcare in the last decade has given a significant return to investors and who knows whether that would continue, some say it would and some say it wouldn’t. But strategies like private credit space could offer businesses that support that. The second observation and you can see that globally. A lot of the governments are actually looking to support the small and medium size enterprises the mid cap stocks exchanges. These are the greatest employers in each of these jurisdictions and that's where all the waters are sitting. So, there is some sort of a testament given by the governments to incarnate landing in this space. So of course, the plans had backed off after 2008, they're coming back. There's a large enough market to actually satisfy everybody.

Speaker name
Jimmy
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Okay. Anuj, just a follow up question on that. So, what, what would actually be a very good platform for setting up a private debt fund? If someone's looking to set one up and, you know, what are the common structures? And I guess you've seen in this space also for very much from a tax perspective, right?

Speaker name
Anuj
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Obviously, there are several factors that are going to work for an investing structure or what it would be. Or what is the infrastructure, location and department, management, where are the fund managers or the investment team sitting? But typically, what we would see is a master feeder structure and there could be many times in offshore jurisdictions like the Cayman islands we are seeing, I saw feeder moving towards Singapore now, and we've had a few funds down recently where investors insisted that the wanted to invest in a Singapore Feeder. But leaving aside the feeder of the master usually tends to be in a jurisdiction where you have the investment team or you have substance and potentially tax. So, in more recent times, we are almost getting a Singapore master funds as the theme. So in terms of whether the Singapore master gives you the best economic outcome, that would depend on barrier lending and so on and so forth, what sort of substance you have in other jurisdictions, but having a Singapore master is kind of giving a balanced outcome to a lot of the investment points on the structure. It does help that a lot of the investment managers in Asia are either based out of Singapore, Hong Kong. You may have some local concrete teams, but the main players are sitting in these locations and therefore Singapore does have that advantage to have the investment team here, as well as the master fund in Singapore. And the second point I wanted to make was Singapore does have these tax incentives, which basically gives you tax exemption all come here to meet the substance requirements and one of the beauties of the Singapore tax incentive scheme is that it does have a Safe Harbour or an exemption on interest loans provided. This is the simplest and most liberal, incentives available in this space. Places like the UK, Hong Kong and US also have some sort of state power, but from my limited understanding, the Singapore state power is very competitive and compelling.

Speaker name
Jimmy
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So, am I right to say that you mentioned Singapore quite a number of times, so essentially Singapore to you, is that the hub for structuring debt funds in Asia in your view?

Speaker name
Anuj
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I think so, it’s not just in the last year or so, it’s been or now five or six years for private credit funds. And one of these plans, as I mentioned earlier, is about investment teams actually being located near the substance here and as it is our potential to be having access to tax treaties, which does improve your economic outcome for investors.

Speaker name
Jimmy
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Okay. And Joe, maybe over to you, do you agree with that, that Singapore is restructuring debt or are you seeing other options?

Speaker name
Joel
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No. No. I think it’s good, Anuj gave a good summary. Suddenly just that the different considerations that go into where the funds are to be ought to be structured. And of course the key one is where is you mentioned, the team sitting now, here in Asia as a neutral third party to just know you're most likely to be funding the managers are either going to be based in Singapore and a friend of this part of Asia or in Hong Kong. And naturally when we look to these jurisdictions and how they structure funds, how that has developed over time. This further sees historically there was a lot of fund structuring that was done, how it came in Cayman Islands, for example, in other offshore jurisdictions, but what we have observed most certainly and I'll say that there's a lot more intense in the past two to three years is that there is a trend of onshore-isation where you are seeing the offshore funds all of the cells are gradually falling out of favour and managers are former willing to consider the use of an onshore fund vehicle. We see parallel trends in Hong Kong and Singapore, Hong Kong, for example, introduced the OFC vehicle about two years ago, Singapore introduced the VCC. Hong Kong just so they had it introduced the Hong Kong LPF, the limits of hardship fund. Singapore, of course has had it for more than 10 years now, but we're in the process of improving it, but, consistent across all this is that, but historically may have been seen as a manager in Hong Kong and Singapore is not increasingly opening up opportunities for the funds also to be found and to be structured on shore in the same jurisdiction as the manager, then it ties to what Anuj was saying about things of substance. Now I'm sitting in Singapore, obviously very pro you know, our fund formation landscape, if you have what we have to offer. But I would say that, you know, quite apart from what I tell clients, I think the feedback from clients has been fairly consistent as Singapore has done a very good job in terms of thinking and managers need the types of investments that they're trying to make, and to then build a tax regime, because it has been in place for many years now around that to accommodate what they're doing. And of course, most recently with the VCC earlier this year, that offering now on a fund structure that is able to leverage off the same tax schemes that you're talking about. And it's very compelling when you're a manager sitting here in Singapore, you've got all the tools sitting at your disposal in front of you in the same jurisdiction. So it's a strong proposition as a hub for funds.

Speaker name
Jimmy
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Are you, are you seeing just, just follow up on that? Are you, are you seeing the BCG being used by private debt managers?

Speaker name
Joel
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Certainly. Yeah. We've, I've been, you know, private debt, when you talk about that, there are lots of different types of strategies, there's direct lending and why have we discussed it and all that. But I would say that certainly across the different types of strategies that we have seen, we certainly have seen, with the enquiries we’ve done, for funds, which have the private debt type of strategy. No doubt. I mean, there are the other reasons as a way for support for, for the VCC, there's the grand scheme happening as well. But I think what's worth mentioning and I'm sure some of you know, my colleagues on this panel with us made a similar observation is that, with the VCC, my personal view is that we have reached an inflation point to the VCC where we've achieved a very decent critical mass of VCC is being set up because with any new fund vehicle, there's always a question mark on the mind of any manager, should I use it, not this new, there's always a risk of something new. And I like to say that I think we've crossed that lease, as the first of many, but so he crossed an inflation point where we thought critical mess. So today I was just looking with 140 plus VCCs on the ACRA website, but why do I say as inflection point, what were previously queries from larger established managers who would have stuck to their standard fund vehicles are now coming to us and saying, I'd like to press ahead. And I like to use the VCC. These are managers who are, who are much bigger. There's no reason for them to necessarily have to change what they have been to, but that's starting to happen. And that to me is critical change, and I think it’s a vote of confidence in the success of the VCC.

Speaker name
Jimmy
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That's great. Thanks, Joel. You know, just on that note on fund managers, I'd like to hand over to Hermant, Edelweiss being one of the leading alternative asset managers in India. I'm sure the audience would very interested to, to know what the landscape is for private debt in India and where do you see the opportunities?

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Hermant
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Sure. Thanks. Thanks Jimmy. Thank you everyone for joining. Let me just give you a background of the Indian economy first, the macro look down. India today is a three trillion dollar economy. It's the sixth largest economy in the world. And when you see the global economy, 80% of the bonds are yielding less than 2%. In fact, 25% of the bonds are in negative territory. And you compare this with India. We are the sixth largest economy in the world. And probably in my view, the only economy of this size which gives you high real returns. So against this backdrop, the interest in India, given a stable political regime, given high real interest rates, I think the backdrop for India is very favourable. Now coming more specifically to your question, Jimmy, the way we see the private debt landscape in India. I think India is going through a similar evolution that the world has gone through with the global financial crisis. Increasingly asset managers have become the preferred vehicles for direct lending and private credit globally, right? I think that's a mega trend that is playing out in front of our eyes and India is going through something very similar. If you look at India, a new study of the landscape, banks in India increasingly want to do retail credit, driven by equity shareholders, a preference to do more granular credit. Mutual funds in India don't do a lot of long-term structured credit. Then it leaves Indian insurance companies and pension funds, which also don't do structured long-term credit, which makes asset management vehicles the preferred choice for doing bespoke structures in the country and which is why you are increasingly seeing a rise of alternative vehicles in the country. So the entire private debt landscape moving to asset managers is just kicking off in a big way. And we believe at Edelweiss that we are at that tipping point, and just to give you some sense, I think at Edelweiss, we ourselves, given the pandemic in this COVID scenario, we closed a $900 million performing credit fund last week. And that talks to you about the global interest in India. Global pension funds and insurance companies are seeing this opportunity and they're willing to commit large pools of capital, with asset managers on the ground in the country. So, the landscape is opening up. I think the opportunity is very compelling. In terms of private, if you look at the entire landscape, I think, the entire private credit to GDP also in India is pretty under-penetrated. If you see China, it is at 200% of GDP compared to private credit, right? US is at 150%. India today is only at 50% of private credit to GDP. So we are an under-levered country in that sense. I think the need for sponsor capital is very high. The providers of long-term patient capital view and real returns are high. So I think both from a demand and a supply perspective, I think the macro picture is very conducive and we're seeing opportunities, I think, on the performing credit side, on the real estate side, on the distressed asset side, across the spectrum of VC opportunities, going into late, double digit rupee returns, especially for the Indian markets.

Speaker name
Jimmy
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Okay. And, just a quick one on infrastructure debt, are you seeing quite a lot of that as well as an opportunity?

Speaker name
Hermant
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So if you look at the infrastructure debt market in India, I think once again, the kind of opportunities available, so what is happening on the infrastructure side in India? I think the government increasingly wants to monetise assets. So the government of India has shown its intention that over the next three to five years, it wants to monetise a hundred billion to three hundred billions of dollars of assets. That is a mega opportunity that we think will play out in the next several years. So if you look at asset ownership in India compared to global markets on the infrastructure side, only 2% of the assets in India are owned by asset managers and Jimmy, this number globally is somewhere close to 40 to 45%. Once again, we're very under-penetrated, we are seeing initial demand and a couple of fundraisers also in the Asia region, which are now looking at infrastructure debt. In fact, we ourselves at Edelweiss are considering something on those lines, because it gives investors an opportunity to invest in long-term assets, 15, 20, 30 years, and yet make 6 to 7% dollar returns on an un-levered basis. So the opportunity is compelling in that sense.

Speaker name
Jimmy
Spoken content

Oh, thanks. Thanks for that. That was very helpful Hermant. Joel, just a question for you. We talked about private debt managers. In your opinion, do they prefer closed-ended structures or are they looking more open-ended type structures? And are there any really benefits of using one closed or open-ended, one over the other, in your view?

Speaker name
Joel
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You know, when we structure funds for clients, a lot of the drivers for, whether it's an open or closed ended structure, is really looking to the underlying asset class itself. Is this a liquid or illiquid asset class? Now private debt, private credit is inherently in its nature illiquid. You can't just sell it tomorrow if you wanted to. So one would say very naturally that closed ended funds would meet that. That's my default answer. But interestingly, when you start to split the hairs a little bit more, and when you start looking at investor demand as well, what some managers have done is that they've tried to mirror that, to address what investors are looking for. So for example, some investors are looking for a bit more liquidity, they don’t want their capital to be locked in so much. So we have in fact seen, I would daresay, a good mix of both closed and open ended, which is not what you would necessarily logically expect given the asset class, but I would say it's probably always been 50 50 in terms of open and closed end fund structures. Now, what then would be some features or ways that people use it differently. Now with the closed construct, it tends to be the case that there's a finite fundraising period, so very important for the manager to be able to ensure that they can identify a strong pipeline of investments that are going to make sure that they can deploy the capital that's committed to the fund as soon as possible. And that affects things like how their management fees are calculated in the post investment period. Open-ended guys have a bit more luxury in a sense, and this was one of the benefits of being open-ended. What do they do? What we have seen certainly is that is open-ended technically, because it means that investors can choose to pool their capital out, but managers must balance that consideration against the illiquid feature of the fund, by saying that there is a certain specified lock-in period. So they will still ensure that they have X number of years with which they're able to deploy the capital. They don't have to worry about liquidity concerns. Another benefit of using the open-ended structure is that they can effectively do different tranches for fundraising because it's continually open as a fund for fundraising. So, what they effectively do is say, okay, well, I'm going to do my first tranche of seeing what one time, for example, where they do it by reference to share clients. And this is going to be offered on the basis of these terms for this amount of time, and it has its own pool of investors. And then there can be a second tranche that is done a bit later on for a different pool of investors. Now, there are pros and cons. There's a separate call discussion on that, but we are certainly seeing funds that have been structured that were in the open-ended space. And I think the VCC, again, I know there is a lot of VCC conversation right now, but it's actually right for me to say that the VCC, if you are thinking open-ended with the sub fund features that you have, it lends itself very neatly to any manager thinking about doing an open-ended fund in private debt, because you can do different ones within different sub funds, you have the benefit of ringfencing, of course, you've got the tax benefits as well.

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Jimmy
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To a certain extent, would that be very much investor driven as well?

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Joel
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I'd say that certainly, the push for the open-ended structures is far more investor driven and than it was on the closing side.

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Jimmy
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Thanks for that, Joel. Perhaps over to Sukanya. Reporting tools. So, what are the reporting tools that's available out there to debt fund managers. Could you give some of your thoughts around that?

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Sukanya
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Yes . Sure Jimmy. So as we see that there is more appetite for debt and credit risk funds and we see entry of more managers into this space. I think that the manager’s selection will become a vital consideration for investors and hence, understanding of the regulatory landscape along with the investor needs would become very crucial in the debt fund, which is exactly what we're also seeing in the market. And in this, then bringing all the data into a single source where it can be aggregated, diced and reported in different ways, can pose a challenge to the managers. So at IQ-EQ, we have recently developed IQ-EQ Cosmos. This provides a secure and tailored online dashboard that captures all the real data in real time. It turns it into intelligent consolidated reporting and it facilitates active analysis and decision making. It provides both prescriptive and predictive analytics. Some of the dashboards that Cosmos can provide the investor is to give them a geographical view of where their investments are in terms of geographical allocations, sector allocations. It also can provide data on ESG because a lot of funds we are in currently, even in the private debt space, tend to also ask for governance in terms of ESG. So Cosmos also provides a solution there. So Cosmos would provide a secure, efficient, and a cost effective technological platform to meet the client reporting requirements.

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Jimmy
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Okay. Interesting you mentioned ESG because there was a question posed by the audience on ESG. I'll probably reach out to one of the panel to answer that. Hermant, we cannot have a webinar and not talk about COVID-19. So everyone talks about COVID-19 and the impact it has. So, with this so-called economic fallout from COVID-19, how has it really impacted the market for distressed debt? Because I think you mentioned the various debt strategies earlier, and we'd love to hear your views around that.

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Hermant
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Interesting question. So, honestly, when we look at our portfolios, and I look at the impact of COVID on our portfolios and especially on the distressed asset side, I think the least impact has been on the distressed portfolios and that's very intuitive, but that's how actually it's played out, given for reasons how you invest and stuff like that. Maybe those companies that are far more prepared to handle a pandemic type situation than performing companies. And, in terms of the opportunities that we are now seeing in India, there are two things, Jimmy. One, I think the existing pool of distressed assets in India, so, that itself is close to $100 billion distressed assets lying with banks and maybe addressable pool out of that might be 40 to $50 billion from an asset manager's perspective. So, one the existing stock of distressed assets itself is significantly higher. Now in terms of what the pandemic has done, I think there are three distinct opportunities that have opened up. One, I think, as banks have lent to more retail in the last few years, Edelweiss now started seeing opportunities on acquiring retail portfolios from banks. That opportunity is something very new and very unique. So it’s not only about distressed corporate assets, but it’s also about distressed retail portfolios. And that’s a pool that is opening up, recently. I think also what is happening is I think, given a few players who were part of the wholesale credit market, and I’ve been facing the asset liability issues to fund those, for example, mutual funds and non-banks in India, I think that opportunity has opened up when some of these players want to exit their wholesale portfolios and, distressed funds, you know, are buying those portfolios out. So, that's another opportunity. And so you're essentially solving somebody's asset liability, a problem, and, taking charge of the wholesale asset that they had originally underwritten. So, retail has opened up. Apart from this, I'm sure that because of the pandemic, I think there will be a few more companies that will go into distress by whether, for working capital reasons, whether for, you know, short-term liquidity needs. And I think that those opportunities, especially on priority funding, can open up significantly in the short run. So, I think the space is there. Fortunately or unfortunately, in India, I think the distress talk itself is very high. I mean, close to a hundred billion dollars. And, I think we will add a little bit more to it.

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Jimmy
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Yeah. Certainly. Perhaps now would be a good time, you know, for us to jump into Q&A. But thank you very much for the panel of experts. And so let's perhaps now start the Q&A session. So I will try my best to address as many questions as I can from the audience. You know, a couple of questions have come in. If you’d like a specific panellist to answer your question, you know, please mention the panellist’s name first, and then the question. You know, that would help us a lot. Now just looking at the questions. So the first question is more for Joel and Anuj, right. Perhaps Joel more, first. More from a lawyer's perspective, we're back to COVID-19 again, this question is on fundraising. We touched on that briefly. Has that really impacted fundraising both globally and in Singapore? And perhaps you could comment on that and understood if it’s with taxes.

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Joel
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You know, it's a really interesting question because back in January or February, as the whole situation with COVID-19 was unfolding and people had to stop going into the office and working from home and businesses slow down, etc, the big question in everyone's mind was how's this going to affect my life? How's it going to affect the work that we're doing? And a lot of us will prepare for the worst in the sense that we thought that a lot of things would slow down. But now looking back to, you know, January and February, this has been the busiest stretch I've actually had for some time, you know, surprisingly, and it's true of my colleagues in other offices as well – we speak quite frequently. And in fact, it's very timely because we are having literally this week, our global partners meeting, but virtually remotely. And our results showed us that our funds, our practice has had its best year on record ever in history, you know, and our financial year ended September, so literally just last month. So this is a very clear reflection. The second half of that financial year was all COVID-19 related and this is our best year ever. So it makes you wonder, is it because of COVID-19 or would it have been even better if COVID-19 was not here now? I don't know. I think there's lots of speculation that goes into that, but I would say that on the face of it, it hasn't impacted us because of how busy and how well that we've been doing. But I like to perhaps, you know, just thinking, on my feet a little bit, draw that question in a bit more to where we are. We're sitting here in Asia, specifically, I'm sitting here in Singapore and there perhaps, you know, a couple of more regional macro trends that contributed to that as well. I'd say the first one, is certainly the impacts of Hong Kong. You know, rightly or wrongly, because of what's happening in Hong Kong, we've experienced a bit of a spill of the asset managers who are either opening a secondary office in Singapore in case things become worse, or they've gone as far as to actually shift part of their business or all of their business into Singapore. We are definitely seeing that. In fact, if you read the MAS asset management survey that was just released about a week, or a week and a half ago, you'll see that we've had a large increase in a number of managers just this year. In fact, I was at events where MAS said they had about 790 plus managers. This was in January. I just took a look again earlier this week. Well over 900. I didn't do the math, but I think that's something like between 12 to 15%, mind you, in about 10 months alone, increase in the number of managers in Singapore. And I think that says a lot. I mean, again, I think Hong Kong is a key driver for that. The other thing also is the VCC, I think, has played a big role as well. I think that a lot of managers who were perhaps sitting on the side and thinking, should I, should I not actually get myself a registered licence, decided to give that a try. And I think again, we've seen that reflected both in the number of increased managers, as well as the strong number of VCCs that have been set up. And I'll just point to one, one third factor, which is not so much private debt related. And I believe some of us here are seeing the same thing, which is the flow of private wealth capital into Singapore. Here in Singapore, we regulate the management of private wealth within family offices, where relevant, as fund management. And that I think is another contributing factor. What historically would be family officers or external asset managers are starting to acquire your more conventional asset managers, or fund managers are doing as well. And I think when you take these three different factors, Hong Kong, VCC, private wealth, and then combine it together, that's been a strong push for Singapore as a whole, for a busy time for asset management. Again, I asked the question, what would it have been like if COVID-19 didn't happen? I don't know, maybe even, but it's been good. It's not been a significant impact on a set of, I dunno, probably Anju might have something to say on this as well.

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Jimmy
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Anuj, any views on that?

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Anuj
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I’m going with the same response. I’ll just add a couple more points. One, specific to fundraising, we are seeing that global managers with track records are finding it actually easier to raise money because maybe they have lesser competition today. While startups or small site managers are struggling, maybe because they could not travel or maybe because people are not comfortable with your track record or its not long enough. The other point I wanted to mention was about the growth in wealth, you know, in Asia, in the billionaire and the high net worth community. Actually, Asia Pac is home to 38% of the billionaire population in the world. And what is interesting about that is 81% of them are self-made, and this is much higher than any part of the world. All this wealth being generated is obviously from the businesses they are running but they do have a lot of investable cash and they are going to invest it. From our observation, many of them are themselves going into their own private credit strategy. They are hiring good managers from other funds and they are doing it on their own.

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Jimmy
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That’s right. I agree with your point that we have also seen some of the fundraisers with very established and experienced managers ending up raising more than what the initial target was, you know, and, the challenge is with startup managers, that has been a little challenging. So, the second question is actually around, you know, when Sukanya was answering the panel discussion on ESG, I’d like to, you know, direct this question to Hermant. I'm gonna have two questions on ESG. I'm just going to combine them. The first is, you know, have you had to deal much with ESG issues during your fundraising for private debt funds and also, like kind of a follow-up question in from the audience. There's a strong drive to ESG driven private debt, in green bonds, as an example. So, what is your view of the growth of such asset class moving forward? You know, I guess, from an India perspective as well, you know, if you could share with us some of your views across Asia, you know, that'd be very helpful.

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Hermant
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Sure. So, an interesting one, Jimmy. When we look at ESG at Edelweiss, there are two things. I think, from a core principle perspective, I think ESG is built into all our investing now. There is clearly a negative sector that we do not want to invest in when it comes to ESG. Now, when you look at the entire private debt practice, also, I think the very fact that we invest into mid-market companies, when we invest into distressed companies, I think the kind of employment sustainability that it generates is significantly higher. So in a way, as you were saying, you know, as Anuj was saying, government supporting SMEs globally, I think in a way these funds that we run are also providing capital to both parts of the economy, which are not getting capital and, hence generating sustainability for those firms and hence generating employment in the ecosystem. So, on the infrastructure side, if I have to add, increasingly we are seeing more demand for renewable assets, for transmission assets, assets which are far more ESG friendly. And, you know, at the beginning of the conversation, when we were talking about our infra debt fund, people are now looking at like launching a climate fund, in particular, which is far more focused just on green sectors as such. So, I think ESG is already an integral part of all our investments. And, also, I think, asset managers, inherently in the private debt space, contribute to ESG significantly. And, that is a great outcome, I think.

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Jimmy
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Joel, are you seeing the same ESG issues in fundraising, in private debt?

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Joel
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I would agree. I mean, if you look back maybe to five to seven years ago, you're fundraising, you know, any talk of ESG tended to be solely driven by LPs and only certain types of LPs. You know, multi-lateral DFIs, European, something like that. You know, they’d be the ones coming out and saying, look, I need you to incorporate ESG type considerations, and all that. But now we are increasingly seeing the ESG development on different fronts. So, managers, and I think this is kind of what Hermant was talking about, where managers themselves are now taking the initiative and the first foot forward to say, look, I'm actually factoring ESG. Maybe, it’s my investment objective strategies so I'm building it in. Or they offer to do certain types of reporting, which has some kind of ESG built into it as well. So that's one part of it, but the other part of it is actually the very asset class itself. So all of us I'm sure are familiar with the concept of impact funds and what have you. Again, historically, this was something that was not very much heard of, I dare say, as recently as three, four years ago, you know, you wouldn't hear very much about impact funds out of here in Singapore. But this is increasingly common, you know, right now, literally right now I am working on three impact funds. Totally different sides of it. One has to do with gender lens, another one has to do with sustainable fishing, and another one has to do with plastic, you know. But there are managers now who are deploying a specific set of expertise that to me, you know, ESG was more guidelines driven historically, but now that's coming right down into the asset class itself, into the very ethos and philosophy of what the investment is about and the managers assess. We have a large number of Singapore, if you start looking around carefully, you know, who are in this space as well. And, that to me is representative of a broader trend. I mean, we can also talk about things like green finance and MAS initiatives and all that, but I think all of this collectively speaks to the fact that this is a strong and a very clear development that has not stopped and you're seeing in the region. And I think it will characterise it increasingly in years to come.

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Jimmy
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Okay. Thank you. I know Joel briefly mentioned about MAS. I guess that's a question that came in about whether the Singapore government is actually encouraging this investment strategy in any way, to promote that and to grow that strategy. What are your thoughts around that?

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Anuj
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Yeah. So there are a few ways to look at this. You know, there are specific indicators where private credit funds, are being encouraged, and then there's obviously the broader encouragement to funds. You know, so Joel, you had mentioned about the VCCs and we have had the tax incentive regimes, the 13X and the 13R, 13R since 2006, 13X since 2009. So, these are the broader initiatives to support the fund industry here. In terms of credit, maybe I can mention a couple of examples, you know. One is in 2019 before COVID, what happened was they actually liberalised the 13X, 13R tax incentive regime to allow credit to Singapore-based borrowers. Okay. Previously the incentive regime allowed lending to borrowers, but they had to be outside Singapore. In 2019, they liberalised it. Now the thinking from the government was really to encourage money to go into the domestic market, the midsize companies, the small sectors, you know. That's one indication. The second is, if you look at the government budget 2020, you know, there were four budgets that were presented because of COVID. They themselves had actually opened a line of credit for innovators, you know, and what they're saying is they will match private players who invest or give credit to these players, you know, so the amount is about 200 loss 300 million dollars. So yeah, they are encouraging, and in many shapes and forms, and specifically for credit firms as well.

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Jimmy
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Okay. Thanks. Thanks for that. I think we have time probably for maybe two more questions. Maybe over to you Sukanya, this question is around market development. So, the question is, how do you think that the Asian private debt market will develop over the next three years? I think you're on mute.

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Sukanya
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I think as Simon had shared his perspective on the study of the prognosis of the industry, so yes, Asia is poised for expansion and there is huge room for catch-up with the more development market of US and Europe. Just to refer back to the Europe Preqin data. So, if you look at the regional private debt back deal activity, currently Europe, and, you know, US X North America account for more than 96% of the total value transacted and Asia accounts for 3.3%, despite the fact that 7.5% of the global private debt lies with Asia. But what we are seeing now is that there is definitely increase in the appetite and a change in the investor mood. For example, if you look at countries like South Korea, there is already evidence of growing interest in private debt and they are using this more as a hedge against the economic volatility. In addition to this, I think as you know, some of the other panelists were mentioning, the key role of private debt earlier used to be, you know, funding large debt. Now, you know, this asset is also gaining traction with the SME segment, you know, that was traditionally financed by banks, and since this asset class is underserved by traditional banking, we are seeing a lot of these smaller firms are showing the liquidity by way of venture capital and private equity funding. So, we believe that, you know, the opportunity for the Asian private debt will undoubtedly grow as the market gains momentum.

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Jimmy
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Okay. Thanks. Thanks for sharing. I guess the last question is probably back to Hermant. It's questions around India. We have time for possibly the last question. Can you give forecasts for a group of Indian private debt assets and managers over the next three years?

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Hermant
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So, you know, as I was saying, I think we are at a very nascent stage and I think making forecasts at a nascent stage, it's really not much of relevance. Because the growth that I can see over the next several years is humongous. Okay. And just to put some macro numbers, I think, India today is a $3 trillion economy. We expect India to be a $5 trillion economy in the next five years. Today our credit to GDP ratio is only 80%. We expect this to go to a hundred percent. So that means wholesale credit will grow by around $2.5 trillion in the next five years. And if asset managers take incrementally 10, 20% of this, that would mean 250 to $500 billion that will go to private debt. And there is, so that is the macro opportunity over the next three to five years. And from an opportunity perspective, as I was saying, I think there is enough opportunity in the economy to deploy this capital. So, it's exciting times, at least, in India long-term capital is scarce and providing long-term capital has a risk premium attached to it.

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Jimmy
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So, Edelweiss will be very busy over the next couple of years.

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Hermant
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Absolutely.

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Jimmy
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Okay. I think, I think we've kind of reached, you know, we have come to the end of a session, but, given the time limitation, we might not have been able to answer all your questions. But, you know, we're trying our best to consolidate them, you know, and provide the answers and circulate if necessary. But, thank you very much, Simon, Joel, Hermant, Anuj and Sukanya for your time and sharing your insights with us. You know, it was indeed a big pleasure to speak with you. And thank you also to everyone to the audience was taking the time to join us today. So if you have any other questions on anything, you know, discussed during the session, please do not hesitate to get in touch. Thank you everyone. Have a good day.

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Hermant
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Thank you, Jimmy, and the team, and thank you everyone for joining me. Bye.