Oct 16th, 2020

by Mariko Ishikawa

SYDNEY, Oct 16 (LPC) – Money managers are ramping up fundraising across a range of private debt strategies in Asia Pacific as market dislocation triggered by the coronavirus pandemic sets the scene for a boom.

Australia’s AMP Capital recently launched a mezzanine infrastructure debt strategy in Asia Pacific, while Hong Kong-based OCP Asia is raising US$500m for a direct lending fund to provide senior secured loans to family-owned business and small to medium-sized enterprises across the region.

These developments follow a US$200m raising in March for Singapore-based Pierfront Capital’s private credit fund that finances real estate and real assets across APAC, as well as a US$350m mandate from Canada’s Ontario Teachers’ Pension Plan that India’s Edelweiss Alternative Asset Advisers won in September to invest in performing and distressed credit opportunities.

The fundraising spree comes as investors are increasing their allocation to what is a relatively nascent market in Asia in search of diversification and stability away from public markets amid the global health crisis.

Institutional lenders have also been stepping up in areas where banks have scaled back, mirroring the shift in the US and Europe.

Fundraising for private debt in Asia Pacific includes direct lending, mezzanine financing, distressed and special situations with varying risk returns.

“We are at the beginning of the journey in terms of the opportunity in private debt,” said Bob Sahota, chief financial officer of Revolution Asset Management, which recently won a A$300m (US$217m) mandate from Queensland Investment Corp to originate and manage private debt in Australia and New Zealand.

The boutique manager estimates its addressable market size across leveraged buyout loans, asset-backed securities and commercial real estate debt in the two South Pacific countries are around A$24bn–$28bn per annum.

Fund managers are seeking record amounts of capital in the private debt market globally with an aggregate US$295bn targeted, according to Preqin data as of October. That is up 54% from January when funds were looking to raise US$192bn, according to the private equity information provider.

Interest in private debt is on the rise among investors, especially as global fiscal and monetary stimuli keep yields on traditional fixed income products compressed.

The number of private debt investors in Asia surged to a record 477 at the end of 2019 from 115 in 2014, while assets under management held by private debt fund managers focused on the region more than doubled to US$64bn from US$28bn over the same period, according to Preqin.

Although North America and Europe still account for around 96% of the total value of deals globally last year, the Covid-19 crisis could create good entry points for new players in Asia.

US credit fund Muzinich & Co is planning to launch an Asia-Pacific private debt strategy in the coming months, targeting primary and secondary transactions which yield between 8%–15%. It views middle market companies, typically with an Ebitda of US$5m–$50m, as an “underserved” segment where it can make the most difference.

“Banks have been pulling back lending to middle market companies because the regulatory capital requirements have become more onerous over the years,” said Andrew Tan, head of Asia Pacific private debt at Muzinich in Singapore.

“Their focus has shifted from the next generation of companies that will help spur Asia Pacific growth to large incumbents that are probably not going to see the same level of growth that you might find in some of the smaller companies,” he added. “That’s where private debt has come in to fill the void.”

Muzinich, which had US$1.9bn in combined committed capital and over US$1.1bn in invested capital in its private debt business as of June 30, focuses on super senior loans in rescue financings, senior secured or stretched senior for typical corporate or private equity sponsor-led transactions.

It can also provide secured mezzanine or second-lien financings in situations where it receives good collateral and a reasonable loan-to-value ratio.

“Private debt providers can take a view on a credit or industry and design a bespoke financing without necessarily being bound by the rigid policies that banks sometimes have,” said Denis Rayel, managing director at Muzinich in Sydney.

“In our view such flexibility has helped the growth of the private debt market globally.”

As the market begins to emerge from the peak of the Covid-19 crisis, alternative debt providers are on the lookout for opportunities, especially when companies’ liquidity lifelines and temporary covenant relief expire and economic stimulus starts to taper off.

“Things are not as bad as where we were in March and April, but my impression is that the market hasn’t fully recovered to where it was pre-Covid, based on deals we are pricing and observations around the secondary indices in major developed markets,” said Edward Tong, head of private debt Asia at Partners Group in Singapore.

“There could be a conflux of things which could cause confidence to weaken next year when you think about the poor macro and technical environment which makes for more potential volatility in the market,” he said. “That can open up opportunities for private debt providers like us.”

Muzinich’s Rayel said: “We are also conscious that banks have given temporary waivers to borrowers through the Covid crisis and these will be expiring shortly.”

“Unfortunately, not all companies will find their way through the pandemic impact nor will every existing lending relationship survive. That, we believe, creates opportunity for fresh capital to step in.”

For Revolution Asset Management, Covid-19 has shifted the balance of power in favour of lenders, ending what was largely a borrowers’ market Down Under.

“Prior to the pandemic, there was a lot of liquidity and private equity firms had the driving seat to choose what they wanted in deals – be it more flexible terms, higher leverage and lower upfront fees and margins,” said Sydney-based Sahota.

“With Covid-19 arriving, lenders have the ability to negotiate to be in the non-Covid affected industries and have lower leverage and better upfront fees and margins,” Sahota said.

“The illiquidity premium has increased, and we are able to harvest better risk-adjusted return in the current environment.”