Why some asset owners are avoiding private credit in Asia-Pacific | Asset owners
Despite a multi-trillion dollar funding gap, Asia’s ignorance continues to prevent institutional investors from investing in private debt in the region, as some asset owners prefer troubled regions like states. -United and Western Europe.
Small and medium-sized businesses in Asia face a $ 4.1 trillion gap as banks cut lending in the region, according to the Alternative Credit Council. Investors have taken note, with dry powder hitting $ 16.2 billion in 2019, up from $ 6.1 billion a decade ago.
Some asset owners, however, remain clear, at least for now, as they look to the more established private debt markets in the West.
For example, AustralianSuper said its private debt portfolio will focus on Australia, the United States and Western Europe for now, as it is unfamiliar with lending executives in Asian markets like India. and China.
“We don’t know China or India, which are the two markets that it makes the most sense to look at because of our size and the size of those markets… Some of the smaller countries, you wonder. sort of if you’re going to get the scale needed to realize the size of the investments that AustralianSuper is looking to make, ”said Nick Ward, head of private credit. AsianInvestor.
Likewise, Nuveen, which manages $ 1.3 trillion, of which $ 270 billion is owned by its parent company; The US-based Teachers’ Insurance and Annuity Association (TIAA) continues to focus heavily on the US and Europe.
Of the $ 270 billion in TIAA assets that Nuveen manages, only $ 11 billion is invested in Asia-Pacific, and a small fraction of that in private debt.
“How much of that owner’s capital and how much have we actually allocated to debt programs in Asia-Pacific… Middle East,” says AsianInvestor.
Real estate debt is “a big chunk of the business, at about $ 35 billion, and a good chunk of it is allocated to the US market.”
“In Europe, it is much more concentrated on the British market. So there we are now in our third fund, and the direction of the trip is probably that we will start to consider having a more pan-European allocation to real estate debt, ”he said.
However, he notes that there have been more and more conversations about private debt with clients and that allowances are likely to increase in the future.
“When we think of risk-adjusted returns and where to go, Asia Pacific is a mature market for these asset classes. And certainly, from our point of view, we want to invest more in this space [with] our own proprietary capital and the capital of third parties as well, ”he said.
In Asia Pacific, “Australia and Japan are by far the main markets we would focus on for obvious reasons. Having said that, when we look at the periphery, we’ll start to look at areas like Greater China, Korea – so that kind of North Asian element, ”he said.
Myron Zhu, Manulife IM
Myron Zhu, head of private markets for Asia at Manulife Investment Management, noted that Asian private debt is “still rather nascent compared to its peers in the United States and Europe” and that the domestic bias could encourage investors. Westerners to avoid the mainland.
“European and American investors generally expect a certain risk premium to take on the additional risks of Asian emerging markets, and rightly so. For Asian investors with strong local knowledge, they tend to be more comfortable with the risks within their own markets in general. “
However, he believes there will be opportunities for private debt growth in Asia in the future “as capital markets continue to develop and mature.”
“There are many opportunities to close the large funding gaps that local banks have been unable to fill due to their strict risk controls resulting from regulatory requirements – from senior lending to acquisition finance to special situations, especially in the middle market space, “he said.
Although Asia-Pacific has higher risks, the region’s risk-adjusted returns are proving to be more attractive than in the United States and Europe, argued Michael Marquardt, who was COO at Zerobridge at the time of his interview with Asian investor.
“If you look at high yield default rates as a proxy, the high yield default rates in the United States are around 4%. In Asia, they are around 3%. In Europe, they are around 2.6%. So in fact starting from a default rate on high yield papers – and remember your papers are not guaranteed so it’s even riskier than private credit because we would only be making fully secured securities – Asia is historically less risky than the United States, ”he said.
Source: Zerobridge, Moody’s
RISK ADJUSTED RETURNS
“When you look at the losses given the default rates, Asia is actually slightly higher than the United States and Europe. But the time to get your money back in Asia is actually much faster than in the US and Europe. But also, using Moody’s data for loss given default, the US loss given default rate explodes, to around 25%. But what is happening is that these companies last longer. And when the lender steps in to try to get their money back, because you haven’t made the proper commitments, there’s not much left. “
In Europe, he acknowledged that the private debt market is less risky than in Asia, “but at the same time the returns are double” in Asia.
“So you are compensated for this small risk. In fact, you are well overcompensated. When you pull the data out and get that independent data from Moody’s, it actually indicates that you should invest in Asia now from a risk and reward perspective.
Nonetheless, there are other risks to watch out for, such as regulatory risks “given the developing nature of Asian markets,” said Zhu of Manulife IM.
“This requires fund managers to be extremely sensitive to the goals and directions that local regulators aim to achieve, and build their portfolio exposure accordingly.”
“Various countries in Asia are at different stages of the development cycle and carry their respective associated risks. Ultimately, thorough fundamental research, selecting the right managers and partners with full alignment of interests coupled with portfolio diversification are the best tools to manage these risks, ”Zhu said.
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