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Asia-Pacific Private Debt Market Has Big Growth Potential; Rates Cause Headwinds – Preqin

Tom Burroughes

23 June 2023

The private debt market in Asia-Pacific has big potential to expand and accounts for only 6 per cent of total global assets in this segment, predicts , the research firm. However, it also noted that uncertainty about interest rates has dampened the pace of recent fundraising.

AuM stood at $95 billion as of September 2022, rising by 28 per cent from December 2021.

As banks have reduced forms of lending in the aftermath of the global financial crisis over a decade ago, non-bank sources of credit – sometimes dubbed “shadow banking” – have expanded to fill the gap. Private debt is typically less liquid as an asset class than its publicly traded counterpart – and that creates a premium that investors have sought, particularly when interest rates have been so low for so long. According to a report by BlackRock, private senior and unitranche loans typically deliver an illiquidity premium of between 150 basis points and 300 bps, compared with publicly traded leveraged loans. "And the difference can be significantly wider for opportunistic, distressed and subordinated debt," the giant US asset manager has said. 

While direct lending leads in more developed private debt markets, special situations and mezzanine funds predominate in APAC, Angela Lai, VP, head of APAC and valuations, and Gerard Minjoot, analyst, research insights, said in a note about the data. Minjoot said these strategies can offer higher returns than direct lending, albeit with higher risk.

Minjoot wrote that in 2022, six APAC private debt funds using special situations and mezzanine strategies closed above the $1 billion mark – more than in any other year.

“This mix of strategies may begin to change as more traditional investors enter APAC’s private lending space, looking for better-yielding, floating-rate investments,” he wrote. 

APAC direct lending funds are now in the market to raise $7.4 billion, about half of the targeted capital across all strategies. Fundraising and returns, including those using the direct lending strategy, are expected to outperform other regions. 

Minjoot wrote that after three record-breaking years, global private debt fundraising has slipped back to pre-pandemic levels, amid ongoing uncertainty about base rates. 

So far this year, Preqin recorded 61 fund closes and $96.6 billion raised, compared with $209.6 billion by 229 funds in 2022. 

Preqin forecasts that fund performance will grow at a compound annual growth rate of 9.1 per cent between 2021 and 2027, stronger than North America (7.8 per cent) and Europe (8.8 per cent).