Funding business growth in Asia through private debt
Private debt can help meet surging demand for alternative forms of corporate funding.
Limited supply and robust demand help provide strong tailwinds to the private credit market in Asia.
The environment has helped private credit gain traction in the region in recent years as companies seek out alternative forms of funding to bank loans and equity. That creates a potential market for funding suppliers outside of the banking and private equity industries, according to Sumit Bhandari, Lead Portfolio Manager, Asia Private Credit at Allianz Global Investors.
Banks typically favour relationships with larger companies, while offering a standardised funding approach. Traditional public market solutions such as syndicated leveraged loans and high-yield bonds mainly serve large-cap or larger mid-market corporates. That provides an opening for AllianzGI’s Asia Private Credit, a middle-market lending strategy focusing on high-growth companies in Southeast Asia, South Asia, Oceania and the wider Asia-Pacific, said Mr Bhandari at the AllianzGI Private Markets Day in May 2022.
The strategy focuses on lending across the capital structure and credit risk spectrum. Investment objectives include providing borrowers with bespoke funding solutions otherwise unavailable to them and providing investors with diversified investment opportunities uncorrelated to public markets.
AllianzGI is offering a secured lending strategy that can complement bank financing in mergers and acquisitions and other complex situations or create bespoke non-dilutive solutions for borrowers as an alternative to equity.
The supply of credit to support mid-market companies in Asia is significantly lower than in the US and Europe, with investment grade and blue-chip issuers favoured by primary debt capital markets and bank loan markets, said Mr Bhandari. The global financial crisis caused a partial exit from Asia by US and European banks. Overtime, the loan to deposit ratios of local banks have increased and are now getting close to 100%, diminishing their lending capacity.
But demand for credit in Asia is rising as economies are generally growing faster than in the rest of the world.
Asia Private Credit: a focus on strong mid-market firms
Asia Private Credit focuses on companies with a history of consistent earnings and cash-flow with the potential to grow free cash-flow over time. It also targets companies with a leading position in the market that have differentiated or diversified products or services. A strong management team and current year earnings before interest, taxes, depreciation, and amortisation (EBITDA) of USD 15 to 100 million are also targeted.
The strategy seeks out transactions of between USD 25 to 60 million and a majority lender position is sought. Transactions are typically re-financings, recapitalisations or the strengthening of balance sheets. The portfolio targets multiple countries in Asia-Pacific and a wide variety of sectors.
Asia Private Credit provides a spread pick-up per unit of leverage compared to public fixed income alternatives, said Mr Bhandari, adding it also offered strong covenants and security packages and relatively low volatility.
Since 2010, the Asia Private Credit team has deployed more than USD 3.4 billion in 93 transactions through the secured lending strategy. The investment has generated a weighted average gross internal rate of return of 13.4%.1 Allianz, AllianzGI’s parent company, committed to invest in the strategy in a two-staged approach. The first phase in 2019 was with only Allianz capital being invested. The second phase in 2022 involved investing in pooled vehicles alongside third parties.
