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Semi-liquid private credit strategies in Asia are feasible: Muzinich

Andrew Tan, Asia Pacific CEO at Muzinich & Co, explains what it would take to launch a standalone semiliquid private credit fund in Asia.

Creating an Asian semi-liquid private credit fund would be met with a lot of demand, but it is not without its challenges, according to Andrew Tan, Asia Pacific CEO at Muzinich & Co.

Last month, Muzinich launched MLoan, a semi-liquid European private debt strategy focused on parallel lending.

Muzinich is in the process of fundraising, including from Asian investors, for the strategy, which targets high single-digit net returns and is an ‘evergreen’ strategy, meaning that it will remain open to new subscriptions and redemptions on an ongoing basis.

The strategy primarily invests alongside banks in loans, although smaller allocations may be made to syndicated bank loans and direct lending.

Tan (pictured) said that rolling out a similar Asia-focused semi-liquid private credit fund would meet with demand, although he cautioned that these type of funds, which typically include liquidity sleeves comprising cash and/or public market investments in order to allow for quarterly redemptions, may struggle to meet the high return hurdles among Asian investors.

“Essentially, if I were to create a product in Asia that’s semi-liquid, I would need to be able to beat that return profile in order to make it interesting for investors, which is possible but I would also have to have a mix of Asian public market liquid credit in the portfolio so that if there is a redemption required, I would be able to create that liquidity. That liquidity part of things typically drags down the return of the portfolios.”

The MLoan strategy is a fairly safe strategy compared with more unitranche direct lending products as the strategy focuses on mid to large-cap European companies, typically in the €50m-€100m ($53.4m-$106.8m) range. They also invest alongside banks, making it arguably even safer.

Tan notes that whereas European investors look at a number of different investment criteria, the laser focus of Asian investors, particularly high-net-worth investors, on returns means that creating a similar Asian standalone product would be more challenging.

Muzinich also closed fundraising in June on its $500m Muzinich Asia Pacific Private Debt I fund, a closed-end fund. The fund has invested about 45% of its capital to date, Tan said.

Its key focus is on developed Asia, particularly Australia, New Zealand, Singapore and Hong Kong, and to a lesser extent emerging markets like India and Indonesia, while it plays countries like the Philippines, Thailand, Malaysia and Vietnam more opportunistically.

Unlike a lot of other Asian private credit funds, Muzinich’s focus is more in the $20m-$70m range.

“In that segment of the market, the banks tend to be less efficient because of the regulatory capital constraints. So, when they lend to smaller businesses, the amount of regulatory capital they have to put up is higher and the return on regulatory capital drops,” said Tan.

“So, we actually focus on the lower to core middle market space, typically Ebitda between the $5m and $30m range. In that range, I would say there’s a lot less competition between other private credit players and banks as well. As you go up the size curve in terms of companies, that’s when banks start getting more involved.”

Tan noted overall that the Asian private credit market was far more nascent than other regions, although it is beginning to come into its own as regulators across the region have started rolling out Basel III rules, thereby crimping bank lending to mid-sized companies.

He also noted that one of the advantages of private credit compared to other asset classes is the fact that most loans are floating rate in nature, which has cushioned investors against spikes in interest rates, although he noted that the asset class was not immune to some of the difficult macro conditions.

“We stress test businesses for prolonged higher rates for longer and also the fact that there are increased input costs from inflation, deglobalisation, near-shoring or duplication of supply chains; it makes a somewhat trickier environment to operate in,” he said.

“When we stress test businesses, we have to ensure that these businesses in downside scenarios are able to still keep up with their interest costs, which are higher in today’s market because of the higher rates and at the same time be able to maintain their profitability margins in an environment like this.”

Part of the Mark Allen Group.