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Private credit has even more reasons to thrive in Asia

Overseeing about $2.9 trillion in assets under management, private equity has blossomed in Asia. But with the public offerings market shut and exit deals sparse, PE firms will want to lever up their portfolio companies and boost equity value to appease impatient investors. Private credit will be a useful tool

January 09, 2024 / 10:49 IST
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Those on major indices on average yield about 12 percent, near par with returns on direct-lending deals that the likes of Blackstone participate in in the US. (Source: Bloombereg)

The Federal Reserve’s rapid interest-rate hikes in 2023 and tough regulations on banks have put private credit on the roadmap to becoming an asset class in its own right. In the US, it has grown bigger than the high-yield corporate bonds market or leveraged loans; its prominence even brought heated debate over whether this type of lending can ignite the next financial crisis.

It’s a different picture in Asia. Granted, KKR & Co managed to raise $1.1 billion for its first fund in the region and Blackstone Inc saw “incredible” subscription for its flagship offering in Japan. But with only about $90 billion in assets under management, private credit is still in its infancy.

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However, there are good reasons to believe that the asset class can finally take off in 2024, starting with the sharp disruption in high-yield corporate dollar bond issues. For years, this space was a fertile ground for wealthy Asians, who gobbled up the yield and were drawn to the perceived safety of the investments.

The serial defaults of China’s real estate developers that started with China Evergrande Group’s spectacular blowup in 2021 changed the entire landscape. In notional terms, this market has shrunk by 47 percent since 2020 to about $154 billion. Last year, junk-rated companies raised only $6.3 billion, a fraction of 2021’s record $26 billion. Once we exclude notes that trade at distressed levels, the actual investible space amounts to just $70 billion, according to Barclays Plc estimates. This ATM is broken.