Asian private credit players rush to bridge funding gap at SMEs and in sectors like education, technology

High interest rates and the changing economic landscape after the Covid-19 pandemic are some of the factors that are pushing some companies to private lenders for bridge financing.

“Coming out of Covid-19, high rates, consumer behaviour and economic structures have and will change,” said Bo Hu, head of private credit for Asia-Pacific at HSBC. “Private credit is an important alternative source for companies, particularly those in the mid-market segment, that cannot get bank financing or issue a public bond or issue equity easily, for instance.”

HSBC’s private credit business connects its corporate clients with private debt funds, with the lender sometimes financing these companies directly.

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SMEs have a slimmer chance of obtaining bank loans compared with larger firms, creating a financing gap of around US$2.4 trillion every year in East Asia and the Pacific, the International Finance Corporation estimated, and some private credit providers are targeting this segment. For example, Hong Kong-based private credit manager ADM Capital, which manages US$2 billion in assets, focuses on Asia’s underbanked SMEs by running a secured, direct lending credit strategy.

In Asia, additional credit enhancements can be more easily secured compared with Europe and the US, especially in the SME space, David Whyte, managing director at ADM Capital, said at the Private Equity Forum in Hong Kong last month. The enhancements include securing collateral from family-owned businesses that sit outside a company, accessing cash monitoring and accounting controls within companies, and retaining board seats for greater oversight.

“Due to the limited availability of financing options and nascency of the private credit market in APAC, investors like us are able to continue to identify investments providing appealing returns with stringent covenants and robust downside protection,” said BlackRock’s Yan.

Another area of focus for private credit in Asia is the education sector, which requires heavy capital to develop schools and services, but at the same time enjoys significant growth.

“We are seeing opportunities in the education sector, not just in China but across Asia,” said Chee Jiun Wen, head of private markets and alternatives at Bank of Singapore. “Private credit managers can provide financing to these education companies, as traditional banks have selectively scaled back on lending and are not able to serve companies that may require flexibility or transition financing.”

Education companies have recurring cash flows, and schooling demand is high in Asia, said Chee, whose bank is the private banking arm of OCBC, and works with asset managers to source investment opportunities in a fund format or on a co-investment basis. “With Asian parents emphasising on education, we have seen education services booming.”

Private equity giant KKR has piled into education services, with the sector being the top component of its Asia private credit portfolio, accounting for nearly a fifth of its exposure, the firm said in a report published in November.

The technology sector is also catching the fancy of private credit players, as public markets become hesitant about the industry amid a high demand for capital.

“Globally, technology companies traditionally like to raise financing through the equity markets,” said HSBC’s Hu. “But increasingly, private debt is also becoming a very useful source for them.”

The pipeline for initial public offerings has been crowded with tech-related companies, said Maggie Kwok, Asia head of funds and regulatory practice at law firm Harneys, and private credit funds can respond to borrower demands that banks may find challenging. “That is why there is this uptake on tech businesses, especially start-ups, and those start-ups are looking for capital solutions.”

Additional reporting by Jiaxing Li