Industry players see room for private credit market to grow in South-east Asia

[SINGAPORE] Private credit funds, where investors pool their capital to enable the fund manager to provide loans to companies, are seeing greater interest in South-east Asia, with regional governments also starting to jump on board.

For example, Singapore in its Budget in February announced a new S$1 billion Private Credit Growth Fund to provide more financing options for high-growth local enterprises.

Across the region, sovereign wealth and pension funds are also mulling the potential of building private credit platforms to source for deals.

“Perhaps there’s a call to national service, with these funds studying (to see) if private credit platforms can serve the market,” said Kelvin Poa, a principal with the investment funds practice group at law firm Baker McKenzie Wong & Leow.

But industry players that spoke to The Business Times said that the private credit market in South-east Asia remains nascent and is more fragmented compared with Western credit markets.

“South-east Asia really is a conglomeration of very different economies at very different stages,” said Poa.

Private credit funding tends to be more ad-hoc and less formal in South-east Asia, with investors coming in to lend to a specific company.

Different regulations across the various markets also mean that local expertise is required to navigate the region, which may require personnel on the ground.

Thus, private credit deals by larger players are concentrated in the United States and Europe, where there are more deals and opportunities for private credit.

Investor interest

Private credit saw a boost as banks tightened up their lending, making it harder for certain industries or small and medium-sized enterprises to borrow money.

“When portfolio companies find it more difficult to borrow from banks, other alternative sources of funding such as private credit become more prevalent,” said Sun Zixiang, partner at law firm Rajah & Tann.

However, the interest rate differential between private credit and the US Federal Reserve has since narrowed, meaning that private credit might lose some of its attractiveness.

Despite this, investor interest in private credit as an asset class has persisted. Poa notes that work on the investor side has seen an uptick in the last couple of years.

According to data platform Preqin, 20 per cent of investors polled in November 2024 saw private debt in South-east Asia as presenting the best opportunities. Sentiment is also more positive, with only 8 per cent of investors saying private credit fell short of expectations.

Nearly two-thirds of investors cited diversification as the main reason for them to get into private debt. The opaque nature of private credit funds – where deals are not as well-publicised compared with other asset classes – also appealed to investors.

Still nascent

Without larger international players, the private credit scene in South-east Asia has been led by mid-sized regional players. These funds are more fine-tuned for the nascent markets, and have not done any huge blockbuster fund raises.

“I think the size sort of fits the market because this is still a growing market,” said Poa.

However, some market observers say that South-east Asia alone might not have enough quality deals to sate private credit investors. There is a lack of investor confidence when lending to companies in emerging markets, but in a growing market, there are opportunities to be found.

Still, this is not to say that private credit deals are not happening.

“The private credit market in the emerging markets is relatively nascent, but we believe opportunities abound, and with the right profile, (this) is expected to add depth to the South-east Asian credit market,” said Sun.

He further noted that a greater number of deals are happening in the real estate space, which would have collateral and is a segment that is regarded as more stable in the South-east Asia market.

Poa is similarly optimistic about private credit in South-east Asia. He believes that the sector is likely to grow here, as companies and investors in the region become more familiar with this asset class.

For instance, he noted that many investors might still be unaware that private credit is available in more formal and structured platforms supported by due diligence and regulatory oversight.

“I’d like to believe that there’s still a market for that, and there will still be demand for funds to fill,” he added.