Private credit in Asia (including Japan and Australia) remains an underpenetrated market relative to the size of the region’s economy and demand for capital. Private credit and other forms of non-bank credit represent approximately 20% of the total Asia credit market, as compared to 65% in North America, according to Vijay Padmanabhan, managing director of credit investments at Cambridge Associates, in the investment advisory company’s Asia Insights report.
“Fundraising by Asia-based private credit funds amounted to just 5% of total capital raised by global private credit funds in the trailing five years ending 2023,” Padmanabhan continues. As banks step back from lending to micro, small and medium-sized enterprises without a credit rating, and which are not investment-grade due to regulatory requirements, private lenders could step in.
Private credit is where a non-bank lender provides loans to companies. In a portfolio, which is mainly divided between bonds and equities with a small allocation to the private markets, private credit can serve as a diversifier in a private markets portfolio as debt is less correlated with equity markets.
Returns are achieved by charging a floating rate spread above the reference rate, allowing the lender and investors to benefit from increasing interest rates. Unlike private equity, private credit agreements have a fixed term, meaning that the “exit strategy” for an investment is pre-defined.
Matthieu Chabran, co-founder of Tikehau Capital, says he has no issues about a lack of private credit deals in Asia. “Private credit is quite active. Lending by the banks in the mid-cap space is less active and there is real room for a private lender like us.”
The downside to real estate
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Tikehau describes itself as a global alternative asset management group with EUR46.1 billion ($65.8 billion) of assets under management (AUM), as at June 30. Although it invests across four asset classes — private debt, real assets, private equity and capital markets — its largest sector appears to be private credit. Of the EUR46.1 billion, EUR23 billion is in private credit. Roughly, that comprises direct lending in Europe, direct lending in Asia, and secondary private credit (leverage loans) in the US.
“The market in Asia is really narrow. We invest in real estate debt in Europe and the US, and soon to be in Asia; and what we call ‘special opportunity’ is all the rest,” Chabran says.
Most of the investment — although Tikehau does not break it down publicly— is in real estate, Chabran says. “Mainly it’s credit; mainly it’s real estate,” he clarifies.
“If someone owns real estate, we can lean on the real estate and be a first lien mortgage lender; at times, we can lend to a company, and in order to secure the debt, they give us security on the real estate. It’s a combination of both, but that’s where our debt team and the real estate team work very well together,” Chabran explains.
“This EUR23 billion [private credit AUM] is our largest business. Then comes the second largest business, effectively real estate and infrastructure for EUR18 billion, and that includes private equity and real estate. That’s us buying a building, or buying a stake in IREIT Global UD1U which happens to be a listed REIT, but it’s underlying real estate,” Chabran says. Tikehau’s main assets are in France and Germany, according to him.
It is noteworthy, though, that IREIT’s performance has been patchy. In FY2023, distributions per unit (DPU) fell by 30.5% y-o-y to 1.87 EUR cents due to factors including dilapidation costs, rent-free periods for new tenants, and an enlarged unit base. Tikehau, through its 50% stake in IREIT’s manager, is able to collect fees, including following the divestment of properties in its funds to the REIT. On the other hand, IREIT’s unitholders suffered dilutions to DPU via equity fundraising and a challenging commercial property sector.
“The real estate portfolio we’re focusing on has always been fairly agnostic: retail, office, lodging, hotels, residential. We love residential. We did a big transaction in Portugal not too long ago; we bought 4,500 flats. We look at real estate as a credit instrument,” Chabran says.
For instance, sale-and-leaseback works for Tikehau. “We just closed two transactions in Europe with some large corporates because they have their own debt issues to manage.” These corporates sold their properties to Tikehau and leased them back for 12 years. “They see it as freeing up some cash which can be addressed to manage their liabilities and taking a long-term lease liability, one that enabled them to effectively reset their capital structure,” Chabran explains.
These debt investments enable Tikehau to record a 10% to 12% unlevered return. “We love that for our balance sheet,” he adds. Among the deals he likes is grocery retail, which is a defensive asset in places like Europe and North America.
With returns in the low teens, “even if you’re an insurance company, a sovereign wealth fund, or family office, with too much real estate, they like it because it’s a recurring cash flow”, Chabran points out.
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On the private equity front, Tikehau focuses on energy transition, regenerative agriculture and cybersecurity. “In private equity, we don’t do leveraged buyouts. We do growth equity, expansion capital, defined as entrepreneurs, families, founders. They have a good business, but they need to scale this business. They want a partner who’s going to be investing some capital in to help them grow and scale their business,” Chabran says.
More recently, Tikehau opened an office in Hong Kong. Chabran is reluctant to provide details on Tikehau’s plans in Hong Kong except to say: “We see [Hong Kong] as a great opportunity.”
In April, Tikehau announced a partnership with Flow Capital, a Hong Kong alternatives fund manager. “We haven’t done any transactions yet. We’re going to take a bit of time. When you are new in a country, the first transactions that you see are not necessarily the best ones,” Chabran acknowledges.
Australia, South Korea are credit-friendly
According to Cambridge Associates, investment managers focused on private credit are increasingly pivoting to developed Asia markets such as Australia and South Korea, which are credit-friendly jurisdictions in which banks are retrenching and high-quality collateral is available.
“The presence of higher sponsor activity in these markets creates space for sponsor-backed lending opportunities, while credit opportunities in sectors such as real estate are also rising given a trend of tightening liquidity from traditional lenders,” Padmanabhan says.
In his view, India is a bright spot for managers in the emerging market space, because of its resilient economic growth outlook, improving credit regulations, and credit landscape. “India private credit had predominantly leaned towards distressed credit due to its legacy non-performing asset challenges and, more recently, in the aftermath of its NBFC [non-bank financial company] liquidity crisis. However, the strategies have since broadened to include performing credits in the underserved, mid-market segment, and solution capital to businesses for share buybacks and growth or acquisition financing,” Padmanabhan says.
Lower penetration and competition today create a compelling environment for Asia private credit strategies, as these allow for deals to be executed at better terms, pricing, and covenants, Padmanabhan adds.
