While the majority of investors still come from North America, investors across Asia-Pacific including national pension schemes in Korea and Japan have already increased allocations to alternative investments denominated in both USD and EUR.
The Asia-Pacific private debt market is expected to continue to grow, echoing a boom that occurred in the US and in Europe. Innovations and new strategies are likely to emerge to accommodate investor preferences in the region, presenting more opportunities in private markets, but also potentially introducing more complexity.
What’s the attraction?
The yields offered by the private debt market are a definite draw for Asia-Pacific’s institutional investors given the continuing low interest rate environment. Returns on private debt also appear to be more dependable than some other asset classes. Conversations with our institutional investor clients in Asia-Pacific indicated that the majority saw private debt investments performing well and in some cases better than expected.
The market environment provides favorable circumstances for private debt as banks continue to deleverage and respond to pressures of Basel III and national banking regulator scrutiny. Meanwhile in Asia, “the pace of business innovation, growth and demand for credit in the mid-market borrower segment shows little signs of slowing,” says Alexander Shaik, a partner at ADM Capital which has a 20-year track record of investing in Asia-Pacific private debt.
“The pace of business innovation, growth and demand for credit in the mid-market borrower segment shows little signs of slowing.”
Alexander Shaik, Partner, ADM Capital
Investors’ appetite for alternative assets such as private debt is also being driven by powerful structural changes as the region’s population ages. Insurers and pension funds need to find assets with solid long-term prospects to match such liabilities and are expected to broaden the range of asset classes in their portfolios in order to target higher returns.
The diversity of the private debt market is another boon. There are a wealth of fund choices, with a variety of risk and return profiles. Private debt encompasses a wide range of non-bank loans and strategies including private/growth credit, mezzanine, opportunity and distressed debt. Funds can target real estate, infrastructure, collateralized loan obligations, mortgages and other more specialist areas, such as energy or asset-based loans.
What Asia-Pacific investors need to do
Investors may be able to take advantage of opportunities in private debt by building relevant capabilities. Since private debt is relatively new to many Asian institutions, clients may lack the relevant capabilities and knowledge in-house. Many investors are considering private debt opportunities both within and outside APAC; each jurisdiction has potential considerations investors should appraise. To help to manage costs, investors should consider partnering with firms that are able to offer bundled service offerings, delivering foreign exchange, corporate trust (loan/debt administration) and alternative investment strategies (such as multi-jurisdictional feeder fund structures), which are becoming more popular.
“We are seeing a lot of Asian money going into private debt where the actual assets are not in Asia. Yield-seeking investors in China, Korea or Japan are increasingly interested in collateralized loan obligations and credit funds that deliver returns higher than can be achieved in their home market. Institutions with broad expertise and a global presence will be at an advantage as this market matures.”
Kenneth Cheong, managing director corporate trust, Asia Pacific BNY Mellon
- Emerging Asia-Pacific, which includes Southeast Asia, needs basic infrastructure, such as roads, bridges, hospitals and power plants. Such assets have traditionally been funded by governments or multilateral organizations such as the Asian Development Bank. While these sources remain important, they are no longer sufficient to meet the region’s demands.
- Focusing on costs: Investors increasingly demand greater transparency around fees charged by asset managers and fund providers. In Europe, this has led many firms to separate operational costs from general fund management fees. As a consequence, asset managers are seeking greater flexibility and ease to outsource operational activities to an asset servicing provider.
- Investing in data standardization: In addition to demanding improved visibility of costs and fees, institutional investors are increasingly seeking more frequent, timely, and detailed reports in easy-to-use formats. Daily or weekly valuations are common in the case of high-yield bonds and syndicated loans; quarter-end reporting is suitable for less-liquid strategies such as infrastructure. Emerging disclosure requirements and disparities between regions can add to the challenges of reporting.
“Technology is becoming absolutely critical on both sides of the house. On the buy-side, timely, granular reporting and greater transparency on risk and regulatory affairs helps portfolio managers make better decisions. On the sell-side, managers increasingly need the ability to analyse large amounts of data and automate processes at issuance and throughout the securities’ lifecycle in order to be more competitive in the market.”
Mark Nelligan, APAC head of alternative investment services and structured products, BNY Mellon
