An analysis of capital commitment plans into alternatives over the next 12 months has revealed private debt as the favourite among investors globally, with around half of investors noting they intend to increase their allocations to the asset class, according to new data from Preqin.
In its recent Alternatives in APAC Webinar, the firm referred to this trend as a theme amid higher interest rates and lower credit availability, although capital participation continues to favour the US and European markets over the APAC.
However, despite its relatively small size compared to global standards – equivalent to just 7 per cent of the global private debt market – private debt in the APAC is becoming more popular with assets under management doubling in five years, Preqin’s head of APAC and valuations, Angela Lai, said.
Lai explained that in the APAC, traditional banks still dominate lending with investors turning to private debt as part of their “distressed strategies”. Conversely, in North America and Europe, “private debt can often compete with banks directly as a primary lender”.
However, due to the higher proportion of high-risk strategies, Lai noted that Preqin’s performance forecast for private debt is higher in APAC than in other regions.
Moreover, speaking on the webinar, Peter Graf, partner and head of sponsor direct lending Asia at Ares Management, said that while Asia trails its global counterparts, the opportunity set in the APAC is “tremendous”. Distress, mezzanine, and venture debt strategies have all been popular, but direct lending is also starting to grow.
Graf believes that with $500 billion in dry powder and over 500 firms investing, private debt firms have been focusing on growth equity or growth capital, serving businesses that need debt to grow as their EBITDA expands.
“Asia has seen massive growth over many different countries over the last five to 10 years, where all of a sudden you need debt, because all of these businesses don't have $10 million, $20 million of EBIDTA anymore, they now have $50 million, $100 million, $200 million of EBIDTA.”
Looking at the kind of returns investors can expect to see from the region, Graf highlighted that while the APAC currently has a risk premium over the rest of the world, this might not be the case forever.
“Up until maybe six months ago, it was relatively similar, the yield that you were getting in Asia versus the US and in Europe. But we’ve also seen in the last couple of quarters, in particular, those yields have come down quite a bit in the US market, while they’ve probably been more resilient for Asia as a whole,” Graf said.
“It is important to keep in mind, as you compare some of these bigger jurisdictions against each other, just comparing the numbers isn’t really fair. What does the documentation look like, what businesses are you actually backing? And probably the biggest advantage that Asia has is, all else equal, the growth for specific or individual companies, their industries, and the countries that they operate in, arguably the outlook is stronger for them then other jurisdictions globally”.
Adding that “it's not always an apples for apples comparison”, Graf said the outlook for Asia is “very positive for the long-term”.
Last month, Citi said there is a “clear structural story” taking place in Australian capital markets as regulatory pressures and a declining risk appetite prompt a retreat from banks in the commercial lending market. This, in turn, has opened up an “attractive niche” for private credit, which stood at around $188 billion in Australia last year, according to recent projections from EY.
