Investors overlook APAC private credit despite attractive returns

Institutional investment in private credit across the Asia-Pacific is failing to keep pace with the region’s strong economic growth and more attractive interest rate environment, according to a panel of investors at the Fiduciary Investors Symposium.

Mercer alternatives investment leader, Johnny Adji, said private credit in the region offers a 200-400 basis point compared to US, yet Asia-Pacific only attracts about 5 per cent of flows.

“I think it’s severely discounted the potential and the investment opportunity in this region,” he said at the symposium in Singapore. “If you look at just, for example, on GDP alone – Asia should have accounted for, say, maybe about 25 per cent.”

He said returns in the 9-11 per cent range in the lower middle market senior direct lending sector compared well with historical private equity returns of 15-17 per cent, given PE managers now had to service greater debt costs in a high interest rate environment.

However, it was crucial to choose the right manager given there were fewer to choose from while investors needed to be aware that Asia-Pacific private credit tended to comprise a much higher percentage of a loan – as high as 25 per cent – compared to US private credit.

CPP Investments managing director and head of APAC credit, Raymond Chan, said recent interest rate rises had created more opportunities for credit investors in Asia, given many international funds remain focused on developed markets.

“The opportunity here is huge,” Chan said. “So that’s why I think we are very aggressive in terms of building out the credit book. Basically, it’s more driven by global reactive value as well as the alpha.”

CPP investments had committed close to $5 billion in Asian private credit. It had also taken advantage of recent market dislocation to upgrade the quality of its book from around CCC to a B or BB credit rating.

IFM Investors executive director and co-head of Australian diversified credit, debt investments, Hiran Wanigasekera, said it was beginning to focus on Asia after expanding into every sub-sector in Australia.

“That’s where our next leg of growth in private credit is going to be,” he said.

Returns in its senior secured direct lending strategy had come down slightly to 9-11 per cent on an unlevered basis with credit spreads in the high-four hundred to six hundred basis point range, he said.

Wanigasekera warned that Asia-Pacific private credit is even more illiquid than in other regions.

“We are very firm in saying that private credit is an illiquid asset class,” Wanigasekera said. “There is no traded position. And especially if you’re playing in Asia, the liquidity level drops off the cliff relative to what you can do in US and Europe. So this concept of secondary exit potential in private credit positions really is nonsense factor in this part of the world.”