ANALYSIS

ASIA-PACIFIC

An alternative route
Asian institutional investors are increasingly
warming to the idea private debt. Could this
drive growth in alternative credit within the
region, asks Siddharth Poddar

Tokyo Gate Bridge in Japan, where firms are seeing

a healthy demand for infrastructure-related debt

he journey may not have been as

smooth as in Europe or the US,
but private debt is slowly finding
a place as an asset class in Asia.
Having suffered a financial crisis 10
years before the global meltdown, banks
in Asia-Pacific, while not immune, were
in a better position than their counterparts in the West as Lehman Brothers
fell. The resulting funding gap was much
more pronounced in Europe, which is
predominantly a bank market, says Joseph
Chang, a Hong Kong-based principal on
the private markets group at Mercer
Investments.
Segments of the institutional investor base entered this space and have
an increased appetite for private debt,
including Asian insurance companies,
says Chang. Some finally have a mandate to invest overseas and they want to
get the yield premium that private debt

offers. So there is definitely interest, but

whether they will get there in terms of
allocation is uncertain.
However, most Asian institutional
investors are new to the asset class and
still accumulating knowledge about the
different yield and liquidity profiles on
offer. While some have tasked their private equity or alternatives teams, others

SPEAK TO LPS AND YOULL

SEE THAT THEY ARE VERY
CONCERNED ABOUT THE
PACE OF DEPLOYMENT
OF CAPITAL IN PRIVATE
EQUITY, THE NUMBER OF
DEALS AVAILABLE, AND
THE VALUATIONS BEING
TOO HIGH
Christopher Heine

are using their fixed-income units to

study private debt.
In conversations with institutional
investors and consultants, it is clear that
interest in private debt among Asian LPs
is on the rise.
The data bear out the trend too. In
July, Towers Watson published its global
alternatives survey, showing that investor allocations to illiquid credit in AsiaPacific had jumped to 3 percent of overall
allocations to the asset class, compared
with less than 1 percent recorded a year
earlier. Europe still wins the vast bulk
of investment, but the increase is a not
insignificant grab for market share by
Asian managers.
I guess one of the key things investors are worried about is volatility in
the market (mainly equity markets),
and they have an eye out on the investment environment, says Edward Tong,

Nov em b er 2015 | Private Debt Investor 13

ANALYSIS

ASIA-PACIFIC
senior vice-president for private debt at
global alternative asset manager Partners
Group. But private debt as an asset class
is really interesting for them as it provides good downside protection.
Chang agrees, saying that a few Asian
investors are beginning to invest in private
debt because of the high yield premium
they can get. Private debt is interesting to investors as its risk-return profile
sits somewhere in between public debt
and private equity, whereby it provides
a higher return vis--vis public debt but
is less risky than private equity, he adds.
Christopher Heine, head of Asia
Pacific at Intermediate Capital Group
(ICG), which is currently in the market
for its third Asia fund targeting commitments of $1 billion, says that about half
the capital the firm raised for its second
and third funds has come from LPs based
in Asia-Pacific.
In Asia, ICG invests across the capital structure and mixes debt and equity
instruments to find solutions for SMEs,
using mezzanine as one kind of means
to invest.
Australian LPs are among the more
prominent Asia-Pacific investors in private debt and Heine says their credit
appetite is increasing. The key to unlocking that capital, however, are the consultants such as Tower Watson or Mercer who
advise superfunds considering opportunities outside Australia. The countrys
Future Fund, which held A$117 billion

Tong: private debt as an asset class provides

good downside protection

($85.3 billion; 75.3 billion) in assets

under management as of 31 March
2015, is committed to managers such as
Centerbridge Partners, Oaktree Capital
Management and Sankaty Advisors.
Japanese institutional investors, among
the largest in the region, are also investing
in private debt. Hideya Sadanaga, general
manager of the global product division at
Nissay Asset Management, the investment
management arm of Nippon Life Insurance, which manages assets of about 8.7
trillion ($72.8 billion; 64.3 billion) on
behalf of about 300 institutional clients,
says there has been a consistent, healthy
demand for infrastructure-related debt,
while investors have also been interested
in domestic mezzanine.
Besides infrastructure, it is hard to
talk about any notable increase in appetite for other kinds of debt, Sadanaga says.
Japanese institutional investors are huge

ILLIQUID CREDIT INVESTMENT BY REGION

buyers of US corporate debt, be it the

banks or the life insurance companies.
Theres a lot of money going into US
corporates, but I dont think its going
into private debt for tax reasons among
others, he adds.
Besides Australia and Japan, investors
from the other mature Asian markets such
as Singapore and South Korea, Malaysia
and Brunei are established and either
already invest in private debt or are looking at the space closely. Koreas 500 trillion won ($441.8 billion; 392.3 billion)
National Pension Service, for instance, has
9.9 percent of its assets invested in alternative investment strategies; and around
a fifth of both its real estate as well as
private equity exposure is to different
varieties of private debt, with managers
such as ICG, Oak Hill Capital Partners
and Oaktree Capital Management.
DEMAND DRIVERS

Real interest rates are negative in Europe,

and interest-rate increases are expected
in the US. The biggest high-yield bond
market is the US presumably investors
will have a lot of exposure into the traditional bond market, so they will want to
see how they can protect value on some
of those bond positions going forward in
this environment of increasing interest
rates, says Tong.
He adds that in the private debt market
pretty much all the loans we make
employ a floating rate, so when Libor

ASIA
PACIFIC

3%
53%

2015

20%

24%
OTHER

EUROPE

2014

NORTH AMERICA

61%

Source: Towers Watson

14 Private Debt Investor | Novemb er 2015

38%
1%

ANALYSIS

goes up, investors can benefit from that

uplift. In fact, he says, investors are already
benefitting from a Libor floor from deals
in the developed markets, so that could
lead to more investors coming towards
private debt opportunities.
Moreover, the risk-weighted returns
that managers have shown and are showing are relatively attractive to investors,
says Tong, adding that private credit
returns versus high yield are pretty
compelling when stacked side by side.
Heine says that many LPs both Asian
and otherwise are worried about the
historic returns from private equity in
Asia. Speak to LPs and youll see that
they are very concerned about the pace
of deployment of capital in private equity,
the number of deals available, and the valuations being too high, he says, adding that
private debt as an asset class is seen as
being more predictable and less volatile.
Australian LPs, on the other hand, have
their own reasons for looking at private
debt. Barring a few sophisticated investors with comprehensive programmes,
not many have actively invested overseas
because of great returns they have made
at home in the Australian dollar, says Heine.
But now, they are starting to look at
alternative asset strategies outside Australia and several of them are expressing
interest in direct lending strategies in
Asia, he adds.
JUGGLING JURISDICTIONS

Chang says the key Asian markets are

China, India and certain parts of Southeast Asia, particularly Indonesia. However,
opportunities even in these markets are
skewed in terms of sectors. In China,
the focus is still on real estate and real
estate-related companies; in Indonesia it
is natural resources-driven; and in India,
it is little bit of a mixed bag, he says.
These investments tend to be related to
the growth of companies. And as opposed

IN CHINA, THE FOCUS IS

STILL ON REAL ESTATE
AND REAL ESTATE-RELATED
COMPANIES; IN INDONESIA
IT IS NATURAL RESOURCESDRIVEN; AND IN INDIA,
IT IS LITTLE BIT OF A
MIXED BAG
Joseph Chang

to investing in or lending directly at company level, Asian investors prefer to access

private debt through funds or, if they are
big enough, separate accounts with managers. Besides a bias towards their home
markets, they still predominantly invest
in private debt outside Asia because of
the greater number of opportunities and
market size in those regions.
Asian investors also seem to be most
interested in the performing debt of
companies, mostly through a mixture
of direct-lending and mezzanine on the
primary side, while some is highly structured, investors say.
BIG IN JAPAN

Sadanaga adds that there has been quite

a lot of demand from institutions such
as regional banks for domestic mezzanine
loans given the low interest rate environment. A few domestic mezzanine funds
raised over the past year were so popular that we had to win our allocations,
he says, adding that in Japan there is
demand for higher yielding investments,

especially in Japanese yen. Acknowledging this opportunity, ICG and Japanese

financial services conglomerate Nomura,
partnered to offer Japanese institutional
investors access to domestic mezzanine
investments. The vehicle is investing from
its first fund, which is targeting commitments of 50 billion.
Heine says Japan is a market with relatively large buyouts, most of which are
local and do not involve foreign sponsors, and there is appetite for mezzanine.
Our Japanese strategy with Nomura is
aimed at Japanese yen investors looking
for Japanese yen growth through their
investments, he says. There is a lot of
mezzanine appetite for the kind of riskreturns that we are targeting 10 percent growth and 1.3x multiple.
This needs to be put in the context of
a 2 percent fixed income growth environment, Heine adds.
Sadanaga says Nippon Life Group
invests in mezzanine funds as part of its
private equity portfolio and has done so
for many years now. However, he adds
that he is also aware of a few Japanese
investors who are weary of investing
in domestic mezzanine funds, but willing to invest in US mezzanine funds to
achieve yet higher returns. All in all, he
says, private debt investors in Japan are
a sub-set of the private equity LP base.
Private debt has emerged as an interesting play for the large institutional
investors that want exposure to a different kind of risk-return profile from
both private equity as well as public debt.
Investors say it has become an asset class
in its own right, and particularly looking
at its fundamentals with rights and a
lower risk-return strategy it is starting
to become an important part of Asian LPs
asset allocation and portfolios.
What is not clear is whether those
already investing in private debt intend
to double down on the strategy. n

Nov em b er 2015 | Private Debt Investor 15