Amid predictions that the US Federal Reserve will continue to raise interest rates, Aletheia Capital believes that private credit will prove to be an attractive asset class for Asian investors.
“Private credit may be on a cusp of a further boom in a rising rate and inflationary setting. The asset class may serve its core purpose of superior yields, lower volatility and diversification,” said Nirgunan Tiruchelvam, head of consumer and the internet at the asset management house.
Estimates from the Monetary Authority of Singapore show that the Asian private credit market has grown by almost 30 times in the last two decades from $3.2bn in 2000 to over $90bn in June 2022.
Venture Debt, in particular, has been gaining traction in Asia Pacific, with assets under management doubling to $3.9bn between December 2019 and March 2022.
The global private credit market has also been growing, with volumes trebling between 2012 and 2022 to hit $1.2trn, following increasing demand for different and more flexible products.
Recent data released by UBS’ global family office shows that 27% of investors were taking on private debt in 2022, up from just 8% in 2017. Meanwhile, data from Preqin indicates the average family office holds 10% of its asset allocation in private debt.
This number is set to rise with estimates from a recent survey conducted by the Alternative Credit Council showing that 50% of family offices have plans to increase their private credit exposure.
“The yen should perform well as its ultra-easy monetary policy is abandoned and emerging Asian currencies will be underpinned by positive external balances and direct investment inflows.”
Jim Walker, aletheia capital
These were some of the findings published in Aletheia Capital’s private credit sector report launched in partnership with Alta, a southeast Asia-focused digital marketplace for alternative investments.
The report categorises private credit as non-bank lending debt given out by private investors or organisations. This includes investments in debt securities or direct lending and is estimated to generate an internal rate of return ranging between 6% and 23%, according to a study from Cambridge Associates.
With the Fed Funds rate headed towards 6% and equity markets especially in the US and Europe expected to have another down year, Aletheia Capital’s macro strategist Jim Walker reckons an impeding recession will overwhelm artificially inflated earnings.
To this end, he has taken a liking for Asian emerging markets and India in particular.
“We are also sceptical of the dollar under these circumstances, although it remains the case that the euro and pound are distinctly unattractive too. The yen should perform well as its ultra-easy monetary policy is abandoned and emerging Asian currencies will be underpinned by positive external balances and direct investment inflows,” he said.
Benefits of venture debt include a lower interest rate than conventional debt, the absence of the costs of a full equity raising as well as a structured loan format, which does not dilute the controlling shareholder’s stake.
Some risks that come with the asset class include credit risk from an elevated risk of borrower default compared to traditional assets as well as uncertainty brought about by fluctuating interest rates.
