In an economic environment characterised by geopolitical tensions, high interest rates and heightened regulatory scrutiny of banking systems, Asia’s corporates are increasingly turning to private credit as a source of capital.
“Private credit” is a broad term which can be used to describe an array of lending strategies. Most typically, however, the term is used to refer to the provision of secured loans to companies, usually small and medium-sized entities (“SMEs”) without investment-grade credit ratings, by “non-traditional” lenders such as hedge funds and other specialised credit funds.
The Asian private credit market has grown by almost 30 times in the last two decades, from only US$3.2 billion in 2000, to over US$90 billion in June 2022.
A total of 38 Asian private funds raised US$10.24 billion for private credit lending in 2022, compared with US$2.17 billion from 34 funds in 2013, according to data provider Preqin.
The reasons for this continued growth are varied, complex, and explored in some detail in a paper published on 26 November 2023 by KKR entitled “Private Credit in Asia Pacific: A Region on the Rise”.
By way of brief summary, some of the key drivers include:
• Inaccessibility of alternate financing options: In recent years, following the global financial crisis in 2008 and a number of more recent high profile anti-money laundering scandals in Asia’s major financial hubs, changes to global banking regulations mean that financial institutions are required to subject potential borrowers to greater scrutiny and tighter lending criteria. This, coupled with rising interest rates and the “asset light” nature of many Asian SMEs, can make it more difficult for businesses to accesstraditional sources of funding, such as bank loans, bonds and public equity markets.
By contrast, private credit providers are often more willing to finance SMEs as they are less constrained by regulatory requirements and have more flexibility in their lending criteria than banks.
• Equity protection: For many borrowers, particularly smaller sponsor-led companies, the ability to raise capital without prematurely diluting ownership interests gives private credit a significant advantage over private equity financing solutions.
• Flexibility, speed and pricing certainty: Private credit teams in Asia are often smaller and more nimble than their equivalents in traditional banks, with more easily accessible decision-makers. This means that bespoke financing transactions can be structured and executed more quickly, meeting the needs of fast-growing and evolving businesses.
• Privately negotiated terms and structure: Private credit transactions are typically negotiated directly between a lender and the sponsor/borrower, with a particular focus on due diligence and downside protection.This allows for a high degree of flexibility as to how returns are structured, and the ability to build in bespoke transaction features such as profit sharingand share options.
• Jurisdictional variety: More conservative private credit lenders can choose to focus their attentions on borrowers based in Australia, New Zealand, Singapore and Hong Kong, whose robust legal frameworks offer more certainty in the event of a loan default. Those seeking higher, more “equity-like” returns may look towards jurisdictions such as Indonesia, Vietnam and India, where the potential downsides include lengthy and more complexsecurity enforcement processes in the event of acceleration.
• Diversification: Sophisticated private credit providers are able tocreate highly customised portfolios of investments, with exposure to a range of sectors and jurisdictions, to blend rate-adjusted returns across a variety of private credit strategies.
Serica Trust & Agency is ideally placed to support Asia-Pacific’s private credit transaction parties:
1. Experience
Serica’s experienced in-house legal team has worked on numerous private credit transactions, in a range of different capacities. We have the ability to quickly understand and implement often complex financing structures and bespoke transaction features.
2. Independence
The vast majority of private credit providers lack the “middle office” capacity to enable them to take on roles such as Facility Agent, Security Agent and Custodian that would previously have been assumed by one or more banking institutions on a typical syndicated loan. Independent trust services providers such as Serica fill this gap, providing best-in-class debt administration services at competitive rates.
3. Jurisdictional expertise
Serica’s experienced team is physically based in offices in Hong Kong and Singapore, meaning we are always available during Asia working hours to respond quickly to client needs. We have deep experience of working on transactions involving almost every country within Asia-Pacific and use this knowledge to help clients navigate the regulatory requirements and nuances specific to emerging Asian jurisdictions.
Contact us at enquiries@sericatrust.com to discuss how we can support your business and transactions.
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