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The private debt asset class has achieved incredible growth across the region in recent years, but a more uncertain investment environment is putting operational clarity and resilience in greater focus.
The growth of the private debt industry in Asia Pacific has been nothing short of spectacular. Driven by the desire of institutional investors to tap into sources of uncorrelated returns, attractive yields, and an ever-deepening investment opportunity set, this asset class has readily attracted capital flows over the past few years.
To put this rise into perspective, Asia Pacific-based private debt assets under management (AUM) has grown at an average rate of 29% over the past five years compared to the global average of 17%, according to research conducted by Preqin. Furthermore, competition among active fund managers has been heating up, with the number of players in the region increasing from 249 in 2018 to 382 by September 2022, an impressive 53% jump. Not to mention a healthy roster of global brand name alternative investment fund managers like KKR, Apollo, Blackstone, and Oaktree, launching new blockbuster private credit strategies targeting regional opportunities in recent years.
As traditional lenders face further pressure to tighten financing criteria and shore up their balance sheets across the region, especially in the wake of recent bank collapses and reorganizations we have witnessed worldwide, we expect private debt to capture a wider market share of credit demand. That being said, success in this increasingly competitive space is not guaranteed. We expect it will get much harder to maintain going forward as uncertainty, investor demands, and technology innovation continue changing the game.
Similar Challenges, Bigger Expectations
The uncertainty of the current investment climate poses significant challenges and new risks to this maturing asset class that will require fund managers to rethink how they deliver value to investors and ensure the long-term competitive advantage of their operations.
The attractiveness of private debt from a funding and investment standpoint lies in its inherent flexibility. Its bespoke nature encourages finding innovative solutions to some of the most challenging and unique capital requirements facing institutional borrowers, rewarding fund managers that can deconstruct and manage often opaque risk exposures. However, this characteristic brings portfolio management challenges that are often misunderstood or underappreciated. This is especially true for fund managers running successful strategies in other asset classes, such as private equity or even public markets, who are looking to launch a private debt business in hopes of bringing their expertise to this space.
Take, for example, the volume of data processing to effectively manage various loan aspects such as facilities, maturity timelines, repayment schedules, interest rates, collateral specifics, covenants, and jurisdictional nuances. This needs to be seamlessly aggregated with public market data to execute and maintain risk mitigation and hedging strategies at the portfolio level. Additionally, managers must establish a resilient data and technology model that brings together borrowers' financial disclosures, compliance information, portfolio accounting, liquidity management analytics, and consolidated fund performance data to begin making sense of their exposures.
Overlay this with the current investment environment defined by tightening liquidity and cash flow ambiguity, and you have a recipe for disaster should high-quality information fail to be available at the right time and place or in a readily usable way to make nimble decisions. Against this backdrop, investors are adding pressure for more transparent and detailed reporting, as well as almost real-time communication from their fund managers – a demand that has grown over the years but has become more acute in the last couple of years of heightened market volatility.
To make matters worse for general partners (GP) looking to build a secure foothold in APAC, the region’s heterogenous nature exacerbates many of these issues. Highly-differentiated regulations, tax regimes, financing laws, borrower expectations around lending covenants, cultures, and even languages converge into an investment universe akin to a “spaghetti bowl” of unstructured and unstandardized assets that add complexity to an already challenging asset class to navigate. Untangling and making sense of this in a meaningful way that can scale and be properly understood at the portfolio level is no easy task.
Embracing Technological and Operational Excellence
What does this mean for fund managers looking to get or stay ahead in Asia Pacific? On the surface, it means GPs need support. It is impossible to run a competitive private debt offering in the region with highly-manual operational processes and outdated systems. There is too much information, and the stakes are too high for fund managers to try. We have readily observed from our clients and prospects active in Asia Pacific that, from top firms down to star managers looking to strike out on their own, they all know that equipping themselves with the proper operating infrastructure and technology stack is paramount to long-term success.
Being able to bring often disparate data sets together, from both the public and private market, to analyze them together on a spot and forward-looking basis is key to getting a complete view of portfolio risk and liquidity to do this in a timely and accurate manner for thousands of positions requires a close symbiotic relationship with technology and automation to do well.
Indeed, the power of technology has been an essential factor in the rapid growth of the private debt market for some time. It has unlocked deeper research and due diligence capabilities, as well as facilitated sophisticated data gathering and analytics capacity at a scale once only dreamed of. In Broadridge’s experience working with leading private debt managers, we have always felt an innovative spirit of continual improvement that challenged the boundaries of competitive advantage.
The problem is that the barrier to technological and operational excellence is increasing. Not only are the systems and software involved getting exceedingly more complicated, but trying to keep pace with innovation today is almost unfathomable. To overcome this challenge, fund managers have rightfully looked to lean on their existing technology vendor relationships. In doing so, however, senior leaders must consider the partner’s multi-asset platform capabilities and experience to truly realize the long-term benefits and synergies available. Find someone that can bring value-add by mutualizing the costs and risks of digital transformation at a scale that matches your future need.
The Future of Private Debt in Asia Pacific
Although we believe that the future of Asia Pacific’s private debt market is undoubtedly full of opportunity, it will demand adaptability and innovation from industry participants. Broadridge expects to see more alternative investment and multi-asset managers of all sizes look to launch private debt strategies targeting the region, leading to a broader range of specialized strategies from direct and sponsor-backed financing to complex structured credit and asset-backed lending funds actively deploying capital. Indeed, the future of private debt in the next five years will quickly become very different from the burgeoning industry it is today.
To succeed in this promising yet competitive landscape, firms must deliver strong investment returns and embrace operational and technological excellence to thrive. Greater uncertainty and volatility will continue to define the macroenvironment requiring absolute clarity across increasingly complex portfolios that extend down into individual securities to navigate effectively. Challenges will also require firms to have not only a real-time, always-on view of their collective holdings at a single point in time, but also to have the ability to visualize data sets in a highly predictive and automated manner.
More often than not, leveraging the capabilities of a high-quality technology partner that understands the nuanced complexities of these idiosyncratic credit portfolios and the practical realities of emerging technologies will become more critical in this respect. GPs must feel empowered to focus on cultivating proprietary deal flow, managing shifting risks, and delivering consistent returns for their investors instead of the fitness of their operating infrastructure. As private debt firms navigate the challenges ahead, those that can remain at the forefront of innovation will be best positioned to unlock the vast potential of this booming market.
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