Private Credit Has a New Target: Asia. It’s a Steep Growth Curve.
The global private credit craze is spilling into the globe’s fastest-growing region, Asia—with explosive potential, eventually.
Goldman Sachs Group and Mubadala Investment, the sovereign wealth vehicle of Abu Dhabi, announced a $1 billion Asian private credit fund in February. That follows a $1.1 billion vehicle that private markets giant KKR unveiled two years ago.
These ventures look tiny compared with the $34 billion U.S.-oriented direct lending fund that Ares Management just announced, breaking industry records. But Asia’s growth curve could be steep.
“Asian credit markets are bigger than the U.S. and Europe combined, and they show increasing need for out-of-the-box thinking,” says Michael Ewald, global head of Bain Capital’s private credit group.
Asia shows some of the precursors that set private credit afire in the West after the 2008-09 financial crisis. Banks still dominate the market, accounting for 79% of total credit in the Asian-Pacific region compared with 33% in the U.S., according to Nomura.
Regulators increasingly restrict those banks’ lending after past excesses, says Michel Lowy, whose Hong Kong–based SC Lowy is aiming for $750 million in its third regional private credit direct lending fund. His firm lately jumped in to fund an Indian plastics manufacturer that was barred from bank financing “at the holding company level,” for instance. South Korean authorities are tapping the brakes on banks that look overexposed to real estate, Lowy adds.
Private equity, which drives most large private credit transactions in mature markets, also looks poised for a breakout in Asia as interest rates edge down and economies rev up. Asian private-equity funds were sitting on $486 billion in “dry powder” at the end of last year, according to consultant EY.
Private credit faces plenty of obstacles in Asia, too. The region’s two economic giants, China and Japan, are largely off the radar screen: China because lenders fear the political crossfire, and Japan because bank finance remains cheap and abundant.
That leaves a choice between smaller economies like Australia, with reliable grounds rules, and high-growth markets like India, where governance looks shakier. Big global credit names tilt toward the former, though Indian private credit deals jumped nearly 50%, to $7.3 billion, last year, EY reports.
Bank credit remains entrenched in Asia for both political and cultural reasons, says Jeffrey Griffiths, head of private credit at private markets advisor Campbell Lutyens. “Governments in Europe and Asia want to see banks continue to support local companies,” he says.
Asian business, ex-Japan and China, is dominated by family firms with conservative attitudes toward debt, he adds. “The family-backed entrepreneur doesn’t want the levels of leverage you often see in the U.S.,” Griffiths says.
Asia isn’t a major focus for the new frontier in private credit—loans to investment grade corporates, says Michael Zawadzki, global chief investment officer for Blackstone Credit and Insurance.
“You’ll see this expand in North America first, then Europe and Asia,” he says. “Our geographies for investment grade are all in developed markets with established bankruptcy and credit protections.”
Over time, Wall Street’s latest financial alchemy will find its place on the continent whose capital needs are growing most voraciously.
“Asian private credit is an increasing focus for many asset allocators,” says Michael Small, a member of KKR’s global private investment committee. “With a high degree of certainty, I’d say most allocators will be talking about it in five to 10 years’ time.”
There may be opportunity in beating the crowd, though.