Preqin survey shows LPs cooling on private debt opportunity in APAC
August 28, 2024 (Preqin News) – Singapore-based SeaTown Holdings International has closed its second private credit fund at $1.3bn despite the slow fundraising market for private debt in Asia.
SeaTown Private Credit Fund II launched in November 2022 and held a first close with $1bn raised later that month. However, the fund took 21 months to secure an additional $300mn and fell short of the $1.5bn target reported when it was launched.
Fundraising globally for private debt has held up in recent years, with $209.9bn raised in 2023, $224.1bn in 2022, and $238.9bn in 2021, the three highest totals ever. However, Asia-focused fundraising has fallen from $12.4bn in 2021 to $11.1bn in 2022 and to $7.9bn last year, according to Preqin Pro.
Asia-focused private debt funds have consistently achieved target sizes over the past three years, with average percentage of target sizes raised hitting 128% in 2021, 105% in 2022, and 110% in 2023. However, the average time in market to final close has lengthened dramatically, from 13 months in 2021 to 28 months last year.
Preqin is currently tracking 110 Asia-focused private debt funds in market, with an aggregate target size of $29.6bn. These include vehicles managed by HSBC Asset Management, HSBC Ventures, Kotak Alternative Asset Managers, Apollo Global Management, RRJ Capital, Bain Capital, Goldman Sachs Asset Management, and Edelweiss Alternatives.
Asia’s private debt market remains relatively underdeveloped. In Private Credit in Asia Pacific, alternative asset manager KKR showed that the ratio of private equity to private debt assets under management (AUM) was 30.8x for APAC, far higher than 5.2x in the US and 3.5x in Europe. The report noted that banks provide 29% of total credit in APAC, compared with 54% in Europe and 33% in the US.
‘We believe the current state of private credit in APAC is comparable with that of Europe at earlier stages of market development, when banks provided most of the capital for private equity buyouts. We expect private debt to gain market share in financing private equity-related transactions in APAC over the next decade as market penetration trends toward the levels in more developed credit markets,’ KKR said in the report.
LPs surveyed for the Preqin Investor Outlook H2 2024 have cooled on Asian markets in recent years. The proportion of investors saying South Korea, Japan, or Singapore provide the best developed market opportunity for private debt has fallen from 6% in 2020 to 2% in June 2024. The proportion of investors saying China, Southeast Asia, or India provide the best developing market opportunities has fallen from 37% to 20% over the same period.
This likely reflects risks not present in more established markets, particularly around developing legal systems in some countries. In its report, KKR said it typically sees a 50-100 basis point premium in APAC over the US and Europe on direct lending deals, rising to 300-500bps on subordinated loans. However, the manager said favorable market dynamics meant lenders could secure enhanced protections in structure, governance, controls, and collateral.
SeaTown, a wholly owned subsidiary of Singapore sovereign wealth fund Temasek’s asset management subsidiary Seviora Holdings, said its private credit strategy was ‘targeting a net return in the mid-teens and a double-digit distribution yield to investors with structured downside protection.’
Angela Lai, Head of APAC and Valuations in Preqin’s Research Insights team, said in Alternatives in APAC 2024: ‘In the global context, APAC private debt is a small niche market. Our return forecasts of 10.9% over 2023-2028F, while above other regions, reflect that APAC private debt is skewed to the higher risk, higher return special situations, and distressed strategies, compared with North America and Europe where direct lending is dominant. This is because banks remain the primary lenders in the direct lending space here, but also because the risk premium on APAC credits has come down compared with the more developed markets, rendering them slightly less attractive.’
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.