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Private credit investing in Asia set to expand along with fintechs
SMEs face US$4.1 trillion financing gap as banks unable to meet all of their needs
16 Oct 2020 | Darryl Yu

Looking for diversified and meaningful returns, an increasing number of investors in Asia are slowly turning to private credit as a source of opportunity. That’s according to a recent report by The Alternative Credit Council (ACC), which highlighted the growth in Asian private credit strategies over the past several years.

From US$275 billion in assets under management (AUM) globally in 2009, the industry grew three times in just 10 years to US$812 billion based on Preqin Pro data. Asia-Pacific AUM conversely grew close fivefold between 2009 and 2019.

While the growth in Asia is noteworthy, the region still only accounts for 7% of allocation in the overall private credit market, even though the total Asian proportion of global GDP is around 34%. ACC predicts that interest in private credit looking at the region will change in the coming years with a third of private credit fund managers polled indicating that they intended to invest more into Asian markets (excluding China and India) over the next three years.

The expected growth in private credit allocation into Asia comes at a time when small and medium-sized enterprises (SMEs) are seeking new sources of funding to grow their businesses in the post-pandemic world. Asian SMEs, according to the Asian Development Bank, are currently facing a US$4.1 trillion financing gap as banks – their traditional source of financing – are unable to fulfill all of their needs.

ACC’s data also shows that private credit investors were willing to step into this gap, revealing that SME lending and mid-market direct lending were the most prevalent among private credit investors. “The market has always been there in Asia. There is just more awareness now,” explains Jiffriy Chandra, managing partner and CIO at TransAsia Private Capital. “It really doesn’t make sense for Asia, the fastest-growing part of the world’s economy to be left out of private capital development.”  

Chandra believes that the challenge in Asia isn’t the lack of opportunity, in general, but difficulty in capturing this opportunity in a very scalable manner. “When investors in developed and sophisticated markets branch out to other geographies, they need meaningful size or else it’s too much work and too much risk for them.”

With the ongoing Covid-19 pandemic reshaping the way we work and interact, companies have been under pressure to ensure financing to support their operations. Financial technology (fintech) companies, on the other hand, have been able to ride out the storm. Fintech firms in Asia were able to generate around US$1.4 billion (S&P Global Market Intelligence data) worth in funding in Q2 2020 from investors, including private credit.

In the coming months, expect capital to be allocated towards fintech companies as the pandemic prompts companies to look for digital solutions. In the past few months, there have been some notable fundraising deals in Asia, such as banking technology firm Thought Machine’s US$125 million series-B funding round and online invoice trading platform Incomlend’s US$20 million series-A funding round.

Moreover, there have been efforts to digitize and formalize the whole process of private capital participation. Recently, in Singapore, the Hg Exchange (HGX) was established, creating the first member-driven private exchange in Southeast Asia. It aims to connect 500,000 investors online with high-growth companies in the region. 

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