Private credit giants turn to Asia as funding gap widens in region

CNBC

4 days ago

The private credit industry is ramping up its focus on Asia-Pacific, drawn by a combination of evolving capital markets and expanding funding gaps as traditional bank lending pulls back.
The region is also fast emerging as a focal point for private credit investors seeking fresh opportunities outside of the more saturated markets of the U.S. and Europe, industry experts told CNBC.
"Asia is undeniably emerging as a significant private credit growth hotspot," said Nicholas Cheng, head of the private markets group at Standard Chartered Global Private Bank. "The growing funding gap, rapid economic growth, increased sophistication of borrowers, and evolving regulations make it fertile ground."
Data supports the rapid growth. Private credit assets under management (AUM) in Asia rose from virtually zero in 2000 to $62.3 billion in the first quarter of 2024, the latest data provided by Pitchbook showed. That expansion has accelerated particularly in recent years, with AUM more than doubling from $34.3 billion in 2017 to over $62 billion in 2024.
Global players have also expanded their presence across Asia's credit markets. Apollo Global Management was recently selected to manage Singapore's $1 billion private credit fund, which is aimed at supporting high-growth local businesses. Hillhouse Investment is reportedly looking into deploying between $1 billion and $2 billion each year in Japan, as well as aiming to roughly double its headcount in the country.
Evolving regulatory landscapes and global investors' search for higher yields are pushing more capital into Asia's still-nascent but fast-growing private credit markets.
While banks dominate credit provision in Asia far more than in Western markets — accounting for about 79% of lending compared with 54% in Europe and just 33% in the U.S., according to investment firm KKR — that dynamic is shifting. Private credit is stepping in to fill a widening funding gap, particularly for mid-market companies.
"As these countries continue to develop, so too does the number of mid-sized companies that may have difficulties accessing traditional bank financing, opening the door for private credit to service this market," said Kyle Walters, private equity analyst at PitchBook.
On top of that, he foresees that as Western markets mature, more capital will shift to Asia.
"As mature regions like the U.S. potentially start to cap out, you'll see more PE and private credit managers looking at Asia as an opportunity."
The growth of private credit in Asia has accelerated significantly in recent years, especially after the region's high-yield public bond markets faltered amid a wave of defaults and investor caution, JPMorgan said.
"Over the last three years, the public high-yield market almost closed," noted Serene Chen, a managing director at JPMorgan. "That accelerated the development of private credit in Asia, as companies still needed refinancing options."
Private credit funds seized the opportunity to step in with bespoke, complex financing solutions, often targeting companies locked out of traditional funding channels. "Asia's driving over 50% of world GDP growth, but public debt markets remain underdeveloped," Chen added, highlighting a structural gap that private credit is increasingly filling.
Interest spans geographies and sectors. India and Southeast Asia are drawing significant capital, thanks to their strong economic growth and burgeoning middle classes, private credit veterans said. Singapore remains a key financial hub, while Indonesia and Vietnam are becoming magnets for capital, said Standard Chartered's Cheng.
In mature economies such as Japan and South Korea, banking systems remain dominant, but opportunities can be found in mid-market segments, according to analysts.
Japan is known for its robust banking system, so it may not have the upside of other countries, PitchBook's Walters noted. "Still, it does present a country with a stable economy and high quality of credit, two attractive features to lenders," he said.
South Korea, likewise, has a robust banking system, but it has the ability to capture a share of middle market activity, as seen in the U.S. and Europe, Walters added.
China, despite economic headwinds, still presents pockets of opportunity, particularly as banks there deleverage.
KKR's head of Asia credit and markets, Diane Raposio, told CNBC that the private equity company is taking a "highly disciplined approach" in China, focusing on companies with robust cash flows and durable balance sheets.
Australia, meanwhile, appeals to more sophisticated strategies given its mature legal framework and strong corporate activity, Standard Chartered said.
Sector-wise, infrastructure, technology and renewable energy are major themes.
"Infrastructure has been a very big sector because in Asia, especially in emerging market Asia, you still need to build a lot of renewable energy, you still need to build toll roads and you need to build data centers," said Eddie Ong, deputy CIO and head of private investments at SeaTown Holdings International, who added that SeaTown is targeting opportunities in India, Australia and Hong Kong.
Similarly, JPMorgan's Chen pointed out the huge demand for renewable energy, toll roads, and data centers in emerging markets.
But despite the optimism, Asia's patchwork of jurisdictions presents risks for private credit investors — namely, currency fluctuations, legal enforcement issues, regulatory uncertainty, and lack of transparency in some markets — all of which can complicate deals and undermine returns.
"Legal and regulatory environments vary significantly, making loan enforcement and collateral perfection challenging," Cheng said. "Transparency and standardized reporting also lag more developed markets."
PitchBook's Walters said lenders and investors will need to create buffers for currency risks, with volatile foreign exchange markets adding another layer of complexity. Those are often managed through hedging strategies that add costs, he said.
Nevertheless, though the region's credit markets are less mature and more fragmented than those in the U.S. or Europe, KKR's Raposia sees a "significant trajectory" ahead for the private credit industry in Asia.
Although the region accounts for nearly 60% of global gross domestic product growth, less than 5% of local financial assets are allocated to credit, compared with nearly 30% in Europe, she said.
"This suggests a private credit market with room to grow by an estimated $700 billion," she added.
Standard Chartered's Cheng similarly expects the market to continue growing at a "sustained double-digit percentage rate annually" for the foreseeable future, driven by the persistent funding gaps and growing acceptance of private credit as a viable financing tool.