Developed APAC Private Credit: An Expanding Opportunity Set
In this Q&A, Shane Forster discusses the current dynamics in the Asia-Pacific private credit market and how the continued retreat of banks is likely to open up opportunities for alternative lenders.
How have you seen the market and opportunity set evolve in Asia-Pacific over the past decade?
Barings has been on the ground in Asia-Pacific for more than a decade. Already an active investor in private debt in North America and Europe, our team identified parallels in Asia, and saw an opportunity to start investing in attractive private debt deals. This market was very much bank driven in the early days, so we started investing in and around bank structures, getting exposure to good credits that were less levered than the typical unitranche structures we do today. We were one of the early movers, and the market was initially constrained by capacity. For private equity firms, our typical borrowers, private debt became an option but the market wasn’t deep enough. In the last five years we have started to see new entrants, consisting primarily of the debt arms of big private equity firms or other specialist players. That has led borrowers to focus on private debt as a real financing option. Meanwhile, the pressure on banks’ cost of capital has caused them to retreat and much of the expertise from that industry has migrated to private credit.
At Barings, we are purely focused on developed Asia-Pacific, so the majority of our deals are in Australia, New Zealand, Singapore and Hong Kong, where deal flow remains healthy and we see similar risk-return profiles to the markets in Europe and North America. As a manager, we remain conservative, focusing on the more defensive, lower-risk sectors that perform through the economic cycle. We have deployed around $1 billion in the last 12 months in this region, roughly five times what we were doing five years ago. Clearly the market is undergoing significant growth, and there is more to come, not least because of the volume of private equity dry powder available for deals.