Private Debt Investor
Nov 1st, 2021
As the region slowly emerges from a difficult pandemic, Dan Simmons, partner at OCP Asia, sees demand from both borrowers and investors pushing private debt to new heights.
What is the current appetite for private debt in Asia and how is the alternative funding market developing?
There is very robust demand from borrowers across our Asia-Pacific markets. This demand is partly fed by the dislocation created by covid-19 and resultant lockdowns. As was the case pre-pandemic, the traditional banking space is not satisfying the appetite for flexible lending solutions, so the market for private debt continues to grow apace.
The Asia-Pacific market is far less mature than the more sophisticated markets of the US and Europe, which have almost reached saturation. Asia-Pacific is not even close to the level of those markets, so we see a lot of future potential.
How are LP attitudes changing?
From an investor perspective, while we continue to see most LPs under allocated to Asian private debt, many are looking to diversify their private debt allocations into Asia-Pacific.
There is growing interest in private debt from US, European and Asia-Pacific investors as they seek growth, at a time where one could argue that asset classes like equities have reached full valuations.
Increasingly, private debt can be a more protected alternative to private equity for investors looking for Asia-Pacific exposure.
How has covid-19 impacted the region, and what challenges and opportunities has it created for private debt?
The protracted and uneven recovery from covid-19 across different Asia- Pacific markets has created unique opportunities in private debt – particularly in real estate.
The Australian market, where we have significant exposure across our funds, has remained buoyant, despite recent lockdowns. The commodities, real estate and infrastructure sectors continue to do well in Australia. We have seen some delays to asset sales, but that has not been a significant issue.
Other markets such as Southeast Asia have been much harder hit by covid- 19 – the virus is not contained, and vaccine inequity is exacerbating negative market conditions. This ongoing dislocation leads to distressed opportunities, particularly in areas such as the hospitality space.
Covid-19 has highlighted the value of building strong client relationships, resulting in repeat business, establishing robust risk management capabilities, and access to skilled teams on the ground in-market. These three factors have helped us navigate the disruption caused by the pandemic.
For example, if you were participating in a syndicated loan in Southeast Asia without direct control or a relationship with the sponsor, that is hard to handle today as you are unable to see assets on the ground. We have benefited from having access to people on the ground in Indonesia, and in Australia and China, deep relationships in those markets, and control from a credit perspective.
We are still seeing solid dealflow where there are established relationships and existing borrower relationships.
At OCP Asia, we are very focused on holding a diversity of assets as collateral rather than single asset deals. It’s always important to understand the motivations from a borrower perspective and to be in tune with what’s important to the major shareholders and families who control these businesses.
What are the emerging geopolitical trends in Asia that investors and companies need to be focused on?
Asia is obviously a complex market with multiple regulatory frameworks. There are challenges associated with dealing with quite different regimes in Southeast Asia compared with China, for example. We find that the practical experience of investing and learning through difficult experiences is hard to replicate, so having that deep understanding of the markets, alongside the regulatory knowledge, is very important.
There are huge policy changes going through in China now. Globally, investors are focused on these changes because irrespective of whether you invest in China, those policy adjustments are going to impact portfolios.
Our approach to China has always been to focus on issuers where there is offshore collateral and a diverse portfolio, rather than the public high-yield bond space. Certainly, we would be impacted by regulatory change as far as it applies to overall risks in the market outside China, but we think that approach gives us better protection against adverse credit events.
Policy headwinds continue to impact across a number of industries. Investors should be very careful in selecting particular credits and industries or focusing on one area. We have always been very focused on ensuring controlling shareholders having a diversity of collateral, rather than single asset collateral, because sweeping changes can hit an industry, with broad impact, and we want multiple avenues to recovery on a loan.
The key to investing in Asia-Pacific is understanding the diversity of regimes and how borrowers are positioned therein.
What is the outlook for private debt in Asia going into 2022 and beyond?
In the short-term, next year I think there will be continued deal growth as we all hope and pray that we come out of covid-19.
Obviously, it’s currently a difficult situation in Hong Kong and Singapore and other parts of the region, but I expect to see significant deal volume growth and more appetite for private debt.
From a macro perspective, we are only just scratching the surface of the demand for private debt in the region. This asset class is a relatively new market in Asia that’s heading the same way that Europe did quite some time ago, and the US before that.
It takes time for the market to develop and mature, but from a demand perspective it’s very clear that the public bond space is not an alternative to private debt now, given the one-off nature of the market and the inability of borrowers to consistently tap into that. That can only push borrowers to private debt solutions.
What are the most active private debt strategies in the region and how might that change over time?
Rather than focusing on particular strategies within private credit, such as structures that focus on real estate or infrastructure, we prefer to focus on having flexible strategies and diverse assets. Managers who are flexible on their mandate, both from a return and a collateral perspective, and can tailor their solutions rather than being tied to one strategy, are the ones that are seeing more dealflow.
We know from our experience in Asia that rules and regulations change quickly, and assets and industries can fall in and out of favour, so sticking to a single strategy or country can be more difficult.
Having said that, we are currently seeing the most opportunity in the real estate space, and that continues to be a focus for OCP Asia, not just in Australia but also in offshore China and the rest of Asia.
Our real estate strategy is not exclusively lending to property developers or people involved in the real estate industry. For example, in Southeast Asia we have recently provided financing for an established borrower with real estate assets in Singapore to fund a complex cross-border opportunity in another industry. So, we quite like using real estate as collateral to provide funding to other industries, and that is becoming more common across Asia.
The forces of the last 12-18 months have demonstrated the value of flexibility of approach, especially as we see different markets and sectors recovering at different rates.
What about distressed debt?
Up until recently, there was more limited activity in distressed debt and special situations in this region, and it is not a space we are actively involved in. Obviously, Hong Kong and China are starting to look a bit more interesting on that score, with a few situations to get involved in, but on the whole it has been slim pickings. That may well change depending on how the Chinese real estate situation plays out.
Is the market becoming more competitive?
We have seen some new entrants coming into the market, particularly in Australia. There is such a significant funding gap across the region that even with those new entrants, good people are focusing on their own niches and the level of competition is not comparable to the US and Europe where there are multiple term sheets for every opportunity. We are competing against other firms, but also against alternative solutions, like equity or asset sales.
In Southeast Asia and for some industries in Australia it is a policy decision for banks to limit lending, and often they are not able to act quickly enough to support transactions. We don’t see that changing, which is going to sustain demand from the issuer side.
This is a much more nuanced market where it takes a long time to develop a team and relationships, so we believe the returns that can be achieved will be around for some time to come.
We see a great community of US and European investors with appetite to invest and that will likely increase. Meanwhile, Asian investors are also coming on board, and becoming more accepting of private debt as an asset class.
That can only increase in the next five to 10 years, and so overall we see the outlook for private credit in the region looking very positive from many angles.