Large investment managers including BlackRock, Bain Capital and Avenue Capital are expanding their private credit businesses in Asia, according to several people familiar with the matter, as alternative investors step up lending to companies rather than buying them.
Smaller investors and Asia-based private equity houses are also allocating more capital to the asset class and boosting headcount as demand for credit accelerates among small, fast-growing companies and from Chinese groups in need of overseas finance as Beijing clamps down on capital flight.
“Demand for credit among companies in Asia has never been higher,” said Sabita Prakash at ADM Capital in Hong Kong, adding that her group has provided private loans for recent overseas acquisitions by Chinese companies. “The conditions have remained where many companies still struggle to access banks or capital markets and need an alternative.”
The market for private lending — loans extended to companies by players outside the banking system — is increasingly luring investors drawn to the high returns on secured loans without the longer-term risk of taking an equity stake in a company.
Private equity investors often stay invested in companies for as long as seven years, while private loans are usually paid back in less than two years.
BlackRock in April launched its first private credit fund for Asia, seeking to raise $300m-$500m to focus on senior secured lending for mid-market borrowers, people familiar with the matter said. BlackRock declined to comment on the fundraising.
Bain Capital is also raising money for an Asia-focused private credit fund, while Avenue Capital is expanding its private credit operations in the region, according to people with knowledge of the matter. Bain and Avenue declined to comment.
Private lending resembles standard bank lending but with less regulation and much higher interest rates — often between 15 per cent and 25 per cent annually, compared with less than 10 per cent for typical bank loans.
Companies often approach private lenders when they are unable to access credit from banks. Many global banks have pulled back from lending to mid-market companies because of regulations that have increased the cost of taking on new borrowers.
“The people that are forging into overseas deals are very actively looking for private credit because they don’t have the ability to move money offshore and don’t have the ability to borrow onshore,” said Itamar Har-Even, co-chief executive at Hong Kong-based investment bank and fund adviser Ion Pacific.
Data on the private credit industry are notoriously opaque, given the private nature of the deals. Numbers from private capital industry tracker Preqin show five funds worth a combined $400m have been raised so far this year, compared with nine funds worth $3bn for the whole of 2016. However, that figure captures only funds that have raised capital specifically for private credit.
“This is an exit environment rather than a buying environment,” said Barry Lau, managing partner at Adamas Asset Management, adding that slowing economic growth in China had made private equity investments increasingly risky. “When you are sitting on all that committed capital, smart money has been moving to private credit.”
China implemented capital controls late last year to curtail cash flowing offshore in the form of overseas acquisitions following a record number of deals in 2016. The curbs have fed demand for offshore loans, often from outside the banking industry.
In one high-profile private credit deal this year, hedge fund Elliott Management saved a troubled €740m Chinese football deal from collapse with a €300m high-interest private loan to the Chinese company, called Rossoneri Sport Investment Lux, to help it buy Italian club AC Milan.