From left to right, Chris Gradel, founding partner, PAG; Celia Yan, Head of China, Asia-Pacific Private Debt Co-PM, BlackRock; Bruce Tomlinson, Head of Alternative Strategies, Sunsuper. On second scroll from left, Andy Thomson, Senior Editor, Private Debt Investor; Raymond Chan, Managing Director, APAC Credit Manager, CPPIB Asia shared his thoughts during a closing speech, “How does the world learn to love APAC debt?” April 22 (PDI)

As demand for private debt investments in the Asia-Pacific region is expected to continue to soar, private credit investors – who provide non-bank finance to businesses or development projects there – should take advantage of the opportunities. and be aware of the differences between countries. , said the experts.

During the two days PDI APAC 2021 Summit Virtual Experience At the end of April 22, international investors, asset managers and other investment professionals gathered to discuss the opportunities that the emerging private debt market in the region may offer and the risks arising from the cultural and legal differences.

“I can see that the search for yield will be in Asia, and that will drive a lot of the inflows into Asia,” said Raymond Chan, managing director and head of APAC credit at the Regime Investment Board. pensions of Canada. “I would expect there to be a lot of refinancing on more favorable financing terms for creditors.”

According to Private Debt Investor, a publication that hosted the virtual event, the funds globally targeted a total of $ 326 billion in private debt at the end of 2020. Of the total, those targeting the Asia-Pacific region, to l exclusion of multi-regional funds, accounted for 5%. The ratio fell from 7.8% at the end of 2019.

Fundraising focused on Asia-Pacific also declined slightly, from $ 5.8 billion in 2019 to $ 5.4 billion in 2020, which also excludes multi-regional funds.

More bargaining power

Although the deal has been a bit slow to recover from the pandemic, the market is still filled with new opportunities for private financing, as companies from countries like China, India, Australia and New Zealand need non-bank financing due to increased regulation of lenders. on the funding ceilings available, among others.

“We are seeing that many small and medium-sized businesses are having difficulty obtaining financing from traditional banks in Asia,” said Lee Soo-cheon, chief investment officer of SC Lowy.

“If you look at real estate finance, not just in India but even the rest of Asia, including Hong Kong, Singapore and Korea, there are a lot of lending limits imposed by the regulator. As a result, people cannot borrow more than certain loan-to-value ratios and therefore have to resort to non-traditional financing to borrow money. ”

Firms – especially smaller than $ 50 million – that have few alternative sources of capital will allow favorable business conditions for private investors, as well as decent downside protections, said Mei Colani Li, chief credit officer. private at VI Asset Management. .

“Businesses of this typical size are still family businesses and they are too large to appeal to traditional national lenders,” she said. “When you have a family business, they usually don’t want (private equity firms) to water down their ownership or tell them how to run their business. So what is happening is that alternative lenders such as private lenders tend to have more bargaining power. “

In the meantime, the Asia-Pacific region is experiencing a growing demand for innovative technological solutions to enable businesses to operate on a day-to-day basis in the wake of the COVID-19 pandemic. This means that the private debt financing needs for projects that aim to achieve fiber connectivity or build data centers are up for grabs.

“This is a large and growing industry and there has never been a better time to provide alternative credit solutions in this area,” said Kevin Smithen, chief commercial and strategic officer of Digital Colony and Colony Capital.

Boots on the ground

Despite the potential for growth, the question remains how to access a region with more than 20 countries using different languages.

Unlike established private debt markets in Europe or the United States, investors would face different currencies and jurisdictions to invest in Asia Pacific debt.

“If you look at Europe and the United States, in terms of language, bankruptcy proceedings, they are simple. It’s much easier to digest in a given crop, ”said Lee of SC Lowy.

“But in Asia, we have a very diverse culture, language and even bankruptcy process for different countries. I think understanding a country in each country, I think it’s a big challenge.

From the left of the first roll, Rosy Khanna Regional Industry Director, Asia-Pacific Financial Institutions Group, International Finance Corporation; Lee Soo-cheon, chief investment officer, SC Lowy; Kei W Chua, Managing Director, Bain Capital Credit; Samarendra Singh, Director, Equity Investment Unit, Asian Development Bank, identified the challenges and growth trajectory for struggling credit and the particular situation on April 21. (PDI)

Panelists at the event said some countries in the Asia-Pacific region, including Korea, Australia, Japan, Singapore and Hong Kong, have so far introduced European commercial law and bankruptcy law to United States, while such a standardized framework is underway in countries like India.

These regional varieties leave private investors hesitant to target all countries in the region. Even in a certain country, culture and regulations may vary by province or city. Professionals say local presence is key to understanding the complexity of the Asia-Pacific region’s variety.

“It tells us quite loudly that in this difficult time having trusted advisers and partners on the ground (gives) a lot of support in terms of deal executions,” Chan said. CPPIB Asia.

For international investors, finding selected legal systems with which investors would feel comfortable and be present can be a starting point, which would later generate a network of partners dedicated to the financial, legal and other aspects of the transaction. due diligence.

“Regarding any investment, it is very important that when you invest in a country, it is on the one hand to work with the right people and on the other hand to know if we can have a healthy ecosystem”, said Celia Yan, Head of China and Co-Portfolio Manager of Asia Pacific Private Credit at BlackRock.

“The most important thing is that you are prepared to get to know the area and the people well, and if things go wrong, who will you turn to, so that you can resolve the situation very quickly.”

Emerging and fragmented market

In what is widely seen as a fragmented market, some investors targeting the Asia-Pacific region are keen to ease the uncertainties.

For example, the World Bank Group handled regulatory reform in part of the Asia-Pacific region to ensure a corporate insolvency framework was in place, before its member International Finance Corp. This laid the foundation for IFC’s distressed asset recovery program that helped the Asia-Pacific region offload $ 34 billion in non-performing loans.

Overall it’s a question of financial stability, said Rosy Khanna, regional industry director for Asia-Pacific financial institutions at IFC.

“We are pushing on old fronts when it comes to regulatory and legal reforms,” Khanna said. “These two elements are absolutely essential to move the market and ensure that the financial system as a whole remains robust, efficient and sustainable over time. … We are moving forward to see where and what kinds of platforms we can create in the market that have the basic framework for out-of-court settlements, for example.

In addition, private investors in the emerging market are learning to understand counterparty risks and the lack of exit strategies.

It’s important to look at risk factors with a borrower background check, in the area where even businesses with high enough credit scores could be prone to default.

“China is trying to price risk properly in debt financing, a good credit rating and how to do that without scaring the market,” said Chris Gradel, founding partner of PAG.

Another point is the lack of investors in the Asia-Pacific region to buy private debt that an owner of debt assets has put up for sale. Unlike the United States, there are not many financiers who can immediately fill the gap if dislocation occurs.

“You have to face the fact that there is no side way out for your situation,” said Anil Gorthy, senior portfolio manager at Avenue Capital Group. “For people in difficulty, it is not a trading but a buy-to-hold and a training.”

PDI said the summit ticket will allow attendees to access on-demand content from the PDI APAC summit. He added the PDI Japan Korea Week 2021 Virtual Experience starts November 9 and 11.

Investors, global credit leaders and strategic partners in Korea and Japan are expected to uncover new fundraising opportunities, gain immediate insight and manage volatility in the post-COVID era. Reservation is now available.

By Son Ji-hyoung ([email protected])