Private Debt in Asia: the Next Frontier?

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PRIVATE DEBT IN ASIA: THE NEXT FRONTIER? PRIVATE DEBT IN ASIA: THE NEXT FRONTIER? We take a look at the fund managers and investors turning to opportunities in Asia, analyzing funds closed and currently in market, as well as the investors targeting the region.

nstitutional investors in 2018 are have seen increased fundraising success in higher than in 2016. While still dwarfed Iincreasing their exposure to private recent years. by the North America and Europe, Asia- debt strategies at a higher rate than focused fundraising has carved out a ever before, with many looking to both 2017 was a strong year for Asia-focused significant niche in the global private debt diversify their private debt portfolios and private debt fundraising, with 15 funds market. find less competed opportunities. Beyond reaching a final close, raising an aggregate the mature and competitive private debt $6.4bn in capital. This is the second highest Sixty percent of Asia-focused funds closed markets in North America and Europe, amount of capital raised targeting the in 2017 met or exceeded their initial target credit markets in Asia offer a relatively region to date and resulted in an average size including SSG Capital Partners IV, the untapped reserve of opportunity, and with fund size of $427mn. Asia-focused funds second largest Asia-focused fund to close the recent increase in investor interest accounted for 9% of all private debt funds last year, securing an aggregate $1.7bn, in this area, private debt fund managers closed in 2017, three-percentage points 26% more than its initial target. Known

Fig. 1: Annual Asia-Focused Private Debt Fundraising, Fig. 2: Private Debt Funds Closed by Primary Geographic Focus, 2010 - 2018 YTD (As at May 2018) 2010 - 2018 30 100% 4% 4% 4% 2% 10% 6% 5% 6% 6% 8% 9% 25 90% 11% 15% 9% 13% 6% 9% 25 7% 80% 19% 18% 28% 70% 24% 32% 39% Rest of World 20 No. of Funds 23% 25% 34% 17 16 Closed 60% 15 Asia 15 13 50% 12 Europe 11 Aggregate Capital 40% 10 8.8 Raised ($bn) 68% 64% North America 30% 58% 61% 58% 61% 6 6.2 6.4 56% 52% 50% 4.4 20% 5 4 Proportion of Funds Closed 3.0 3.1 2.0 1.0 1.2 10% 0 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD 2010 2011 2012 2013 2014 2015 2016 2017 2018

Year of Final Close Year of Final Close Source: Preqin Source: Preqin Fig. 3: Largest Asia-Focused Private Debt Funds Closed, 2017 - 2018 YTD (As at May 2018) Final Close Fund Firm Fund Size (mn) Type Primary Geographic Focus Date CITIC Private Equity CITIC PE Multi-Strategy Fund 13,300 CNY Mezzanine China Aug-17 Funds Management SSG Capital Asia, China, Greater China, SSG Capital Partners IV 1,700 USD Special Situations Aug-17 Management India, Indonesia Bain Capital Special Situations Asia Bain Capital Credit 962 USD Special Situations Asia Apr-18 Malaysia Debt Ventures Fund 3 Malaysia Debt Ventures 4,000 MYR Venture Debt Malaysia Sep-17 Asia, Australasia, Australia, PAG Asia Loan Fund III PAG Asia Capital 950 USD Direct Lending China, Japan, New Zealand, May-18 South Korea SSG Capital Asia, China, Greater China, SSG Secured Lending Opportunities II 815 USD Direct Lending Aug-17 Management India, Indonesia ASEAN, Far East, Indonesia, NV Private Equity Fund III Dominus Investment 481,000 KRW Mezzanine Feb-17 South Korea, Vietnam Edelweiss Alternative Edelweiss Special Opportunities Fund II 350 USD Direct Lending India Mar-17 Asset Advisors EFA Real Economy Income Trust EFA Group 152 USD Direct Lending Global Sep-17 Trifecta Venture Debt Fund I Trifecta Capital 5,000 INR Venture Debt India May-18

Source: Preqin

investors in the fund – which targets high (Fig. 4). This illustrates that direct lending the number of funds that reached a final grade private lending in Greater China, vehicles in the region are typically targeting close and capital secured from 2016-2018 India and Indonesia – include California smaller amounts of capital than funds like YTD, it would seem that fund managers State Teachers’ Retirement System distressed debt and special situations, expect institutional investor interest in the (CalSTRS), San Francisco Employees’ which typically employ investment region to continue on an upward growth Retirement System and Texas Permanent strategies that require larger bitesize trajectory. According to survey results from School Fund State Board of Elections. investments. The largest fund in market Preqin’s H1 2018 Investor Outlook, 30% is Shoreline Capital’s Shoreline Capital of investors feel that Asia presents the best There are currently 31 Asia-focused CNY Fund, seeking CNY 10,000 ($1.5bn) in opportunities for investing in private debt private debt funds in market, seeking an capital. The fund will invest in opportunities (Fig. 6): while this is less than the 44% that aggregate $11bn in capital. The majority in China, with 70% of capital invested in named North America, considering the (58%) employ a direct lending strategy, non-performing assets of banks, loans to relative fundraising in the two regions over followed by distressed debt and special local government platforms and state- recent years it shows significant potential situations (13% each), mezzanine (10%) and owned enterprise loans. for growth in Asia. venture debt (6%). However, only three of the 10 largest Asia-focused funds on the With both the number of funds in market More than 900 investors globally have road will follow a direct lending strategy and aggregate capital sought exceeding stated a preference for Asia-focused funds.

Fig. 4: Largest Asia-Focused Private Debt Funds in Market (As at May 2018) Primary Geographic Fund Firm Target Size (mn) Type Focus Shoreline Capital CNY Fund Shoreline Capital 10,000 CNY Distressed Debt China CDH Mezzanine RMB Fund V CDH Investments 7,000 CNY Mezzanine China China, Japan, South MBK Partners Special Situations I MBK Partners 1000 USD Special Situations Korea Piramal India Resurgent Fund Piramal Capital 1000 USD Distressed Debt India ASEAN, Australia, Far Lending Ark Asia Secured Private Debt Fund I CLSA Capital Partners 750 USD Direct Lending East, New Zealand Asia, India, MENA, Samena Special Situations Fund III Samena Capital 700 USD Special Situations South Asia Adamas Ping An Opportunities Fund Adamas Asset Management 500 USD Direct Lending China Asia, China, India, Avenue Asia Special Situations Fund V Avenue Capital Group 500 USD Distressed Debt Indonesia Greater China, Hong DCP China Credit Fund II Dignari Capital Partners 500 USD Special Situations Kong Orchard Landmark III OCP Asia 500 USD Direct Lending Asia

Source: Preqin

Fig. 5: Largest Asia-Based Fund Managers by Aggregate Capital Raised in the Last 10 Years Total Capital Raised in Estimated Dry Firm Headquarters Fund Strategies Last 10 Years ($mn) Powder ($mn) Direct Lending, Distressed PAG Asia Capital Hong Kong 4,286 1,474 Debt, Special Situations Direct Lending, Distressed SSG Capital Management Hong Kong 4,255 2,300 Debt, Special Situations CITIC Private Equity Funds Management Beijing, China Mezzanine 2,807 1,253 Direct Lending, Distressed Shoreline Capital Guangzhou, China Debt, Mezzanine, Special 1,981 793 Situations Kuala Lumpur, Malaysia Debt Ventures Venture Debt 1,682 741 Malaysia Zhongchen Fund Management China Special Situations 1,578 80 Direct Lending, Special CDH Investments Beijing, China 1,509 994 Situations Everbright Financial Holding Asset Beijing, China Special Situations 1,302 66 Management Dominus Investment Seoul, South Korea Mezzanine 1,186 402 Direct Lending, Distressed ADM Capital Hong Kong 1,094 158 Debt, Special Situations

Source: Preqin

The majority (69%) of these investors region where the proportion of AUM is Asia-focused dry powder has largely been are based in North America, with only higher than the proportion of investors is on the rise since 2006, and now stands at 12% based in Asia, although with by far China. South Korea is home to 23% of all a record $17bn. With investors hungry for the largest proportion of all investors investors in the region and seven of the 10 debt managers to put capital to work, the based in North America, this is perhaps investors with the highest allocations to capital supply pipeline for growth across unsurprising. Within Asia, Japan accounts the asset class. National Pension Service, a the continent certainly shows promise for for nearly half of all investor assets under public pension fund based in South Korea, the underlying strategies within private management in the region but only a has the highest allocation to the asset class debt to carve out a better foothold in Asia. quarter of the investors. The only other among Asia-based investors at $2.9bn.

Fig. 6: Investor Views on the Regions Presenting the Best Fig. 7: Investors with a Preference for Asia-Focused Private Debt Opportunities for Private Debt Funds by Location 70%

60% 59% 4% 12% 50% 44% North America

40% Europe 15% 30% 30% Asia

Rest of World 20% Proportion of Investors 69%

10%

0% North America Europe Asia Source: Preqin Investor Survey, December 2017 Source: Preqin

Fig. 8: Asia-Based Private Debt Investors by Location Fig. 9: Private Debt - Risk/Return by Primary Fund Focus 50% 14% 45% 44% 40% 12% 35% 30% 10% 25% 25% 23% 21% North America 20% 16% 8% 13% 13% 15% Europe 10% 9% 8% 6% 6% 3% 4% 4% 3% 4% 5% 2% 1% 1% Asia 0% 4% India Risk - Standard Deviation of IRR Japan China Other 2% Taiwan Malaysia Singapore Hong Kong

South Korea 0% Proportion of Proportion of 9% 9% 10% 10% Asia-Based Investors Asia-Based Investor AUM Return - Median Net IRR Source: Preqin Source: Preqin

Fig. 10: Largest Asia-Based Private Debt Investors by Allocation to Private Debt Current Allocation to Firm Type Headquarters AUM ($mn) Private Debt ($mn) National Pension Service Public Pension Fund South Korea 577,835 2,942 Eastspring Investments Asset Manager Singapore 188,000 1,050 IIFL Capital Asset Manager India 12,000 800 KB Insurance Insurance Company South Korea 22,512 743 Kyobo Life Insurance Insurance Company South Korea 67,202 538 Public Officials Benefit Association Public Pension Fund South Korea 10,205 520 Hyundai Marine & Fire Insurance Insurance Company South Korea 30,103 229 Mirae Asset Life Insurance Insurance Company South Korea 15,989 144 Hana Alternative Asset Management Asset Manager South Korea 464 139 Shin Kong Life Insurance Insurance Company Taiwan 82,413 137