Private credit can provide the most compelling opportunities in Asia

The time is ripe for pockets of private credit as the market in Asia matures and corporates and financial sponsors gain the confidence to source flexible and innovative financing solutions. Australia and India offer the largest pools of opportunity, with each of these markets benefiting from country specific factors. The other is China where there could be high-quality idiosyncratic opportunities emerging as the macroeconomic environment reaches a new steady state.

Asian private credit markets, especially those of more developed economies whose interest rates are relatively synchronized with the US, have faced challenges as interest rates stayed elevated. Transaction volumes shrunk in a market already dominated by traditional providers of financing such as commercial banks as leverage points were right-sized given higher base rates on funding transactions. Within Asia Pacific, banks provide 79% of total credit, compared with 54% in Europe and 33% in the US, providing potentially a large addressable market for private credit as the economies mature.

But macroeconomic drivers including the expectation of rate increase cycle ending and potentially the US Federal Reserve cutting rates this year, will likely breathe life into regional private credit markets as corporates gain more confidence to seek more diverse, innovative and flexible financing solutions, and M&A activity increases as the valuation gap between buyers and sellers narrows.

Investor interest in private credit in Asia has grown substantially over the last couple of years with global as well as local private credit firms raising substantial pools of capital for investment in Asia.

Private credit providers that have experienced local teams in Asia – and are able to offer both scale and breadth across clients, be it financial sponsors, corporates or real estate companies, and across a wide array of products from syndicated bank debt, unitranche loans and acquisition financing to warehouse, mezzanine and NAV-based financing – will be able to take advantage of these opportunities in the coming years. They will be players who have an integrated and holistic credit offering and can service clients across their credit lifecycle – a performing or distressed credit or somewhere in between.

Australia

Given that the Reserve Bank of Australia moved more or less in tandem with the Fed, a succession of rate hikes in Australia took a toll on lending activities in sectors such as real estate and non-bank finance companies, causing liquidity for these sectors to tighten compared to 2020 and 2021.

But with an end to rate hikes in sight, the pain is set to reduce and transaction volumes will likely pick up. This translates to financial sponsors, corporates and the real estate sector becoming more active in sourcing more financing across refinancing of existing sponsor-owned portfolio assets, new buyout situations, and refinancing or re-sizing of real estate debt.

With expectations that the RBA will cut interest rates in 2024, corporates will also look for more innovative financing solutions to optimize their capital structures if valuations of companies continue to rise.

India

Thanks to a high growth environment, private credit spreads have been compressing and the private sector is seen as more confident to spend on capex. That will likely drive more credit demand as the corporate sector looks to activate investment plans after the general elections when there could be greater clarity on policy and regulatory outlook.

India’s economy is in a sweet spot, with real GDP growth outperforming other major economies, a strong external balance sheet, robust capital inflows, and the financial sector gaining more vitality and resilience to prepare for growth in the decades ahead, said Michael Debabrata Patra, Deputy Governor of Reserve Bank of India, at Nomura’s 40th Central Bankers Seminar in Kyoto, Japan, on March 25.

“It is possible to imagine India striking out into the next decade with a growth rate of 10 per cent,” he said.

Among the bright spots attracting private capital are not just traditionally well-funded sectors such as pharmaceuticals and IT services, but also industrials, manufacturing, consumer durables, wealth management and personal finance sectors.

China

While our base case scenario does not factor in a high-growth environment, China’s economy has likely bottomed out, which could lead to opportunities that look attractive from a risk-reward perspective. This includes high-quality idiosyncratic deals on performing credit in the space previously financed by the bond markets.

There are also sectors such as chemicals, electric vehicles manufacturing, technology and automation, and clean technology, that have been more insulated amid the economic downturn, as well as companies with structures that have the underlying security for financing held offshore. In seeking credit solutions for expansion, all these could benefit from a stabilizing economic outlook for the country.

For further information on Nomura’s private credit business, contact Abhishek Tiwaari or Kushagra Pant.