ADVISORY
ASEAN: Not "as you were"
Asia-Pacific Private Credit Newsletter
July 2023
Representatives from Zerobridge attended the PDI APAC Forum in Singapore on 29-30 March. The keynote speech was delivered by Mr Lim Cheng Khai, Executive Director, Financial Markets Development Department of the Monetary Authority of Singapore (MAS).
The speech is worth reading in full (Mr Lim has done his research) and makes a compelling case for Singapore to act as APAC’s leading private credit hub, a topic we will return to later.
At the beginning of his speech, Mr Lim made the case for Asia’s growth potential in Private Credit. Using data from Preqin, he highlighted the strong growth in the asset class, with Asian AUM overall growing 30x in the last 20 years (from US$3.2 billion in 2000 to US$90 billion in June 2022). But what caught our attention was the regional breakdown:
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“Private credit investments allocated to Southeast Asia by global GPs as at June 2022 was US$65.4 billion, an increase of 52% from US$43.1 billion in 2020.
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[…]
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In India, the total private debt AUM managed by India-based GPs was US$13.4 billion as at June 2022, an increase of 51% from US$8.9 billion as at end 2020.
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In China, this same figure was US$51 billion, an increase of 31% from US$38.9 billion as at end 2020.”
ASEAN is the largest sub-allocation in Asia and has accelerated away from China in the last two years regarding global GP capital allocation.
This top-down data insight is also reflected in our own deal pipeline. The deals we have in the market are all from SE Asia – Indonesia, the Philippines, Singapore, Thailand and Vietnam. Our pipeline can only offer a thin slice of the overall APAC opportunity set, but it’s not usually as concentrated in a single sub-region as it is today.
In this Newsletter we discuss:
1. Thematic focus - We explore why ASEAN may be the brightest spot in Asia-Pacific Private Credit right now
2. News centre - How other regions are viewing Asia in 2023 and other media we found interesting
During the decades either side of the AFC, SE Asia has been a clear beneficiary of globalisation – in global supply chains, manufacturing, tourism and (in some cases) natural resources. The rapid rise of China since its accession to the WTO 20 years ago helped lift the region out of its crisis era slump and provided an unprecedented boost in tourism, FDI and portfolio investor attention as global capital leaned into the idea of the “Asian Century”.
We see the deterioration of US-China relations in the last ten years as presenting SE Asia with both opportunities and tailwinds in the medium term. In FDI, there is the opportunity for the likes of Vietnam to take advantage of the “friend-shoring” trend as US corporations “de-risk” from mainland Chinese operations. US and European institutional investors, cognisant of the greater perceived risks of investing in or, in some cases, even under pressure to divest from, China, are seeking markets that offer similar growth potential with less political headaches. Just outside of SE Asia, we should also consider the red carpet treatment being lavished on India’s Narendra Modi on his recent state visits to the US and Western Europe.
NEWS CENTRE
Is Hong Kong truly “back” after four years of protests and pandemic-induced misery? The signs are positive but post-pandemic, the competition is real (The Economist contra-indicator notwithstanding):
A winner has emerged in the old rivalry between Singapore and Hong Kong (The Economist, 11 May 2023 – subscription may be required)
Churchill are also impressed with what they saw in Asia:
Letter from Singapore (Parts One and Two (The Lead Left, April 2023 – subscription required)
Singapore has been positioning itself as a regional credit nexus for some time:
Singapore Enacts New Corporate Bankruptcy Law to Promote International Debt Restructuring
Still the best eye-witness account of the AFC:
The Asian Financial Crisis 1995–98: Birth of the Age of Debt (Russell Napier, 2021, Random House)
Blessed are the peacemakers…
Singapore keen to play peacemaker as US-China tensions rise (Bangkok Post, 9 March 2023)
For they shall inherit all the earth:
War? What is it good for? Absolutely nothing…
Say it again:
The MAS makes the case:
Defending one’s right not to choose…
… and the potential cost of having to do so:
World Economic Outlook: A Rocky Recovery - Chapter 4: Geoeconomic Fragmentation and Foreign Direct Investment (IMF, April 2023)
Great summary of the PDI 2023 APAC Forum:
Reflections on Singapore’s key talking points (PDI, 6 April 2023 – subscription may be required)
Latest World Bank Regional Outlook:
Global Economic Prospects – East Asia and Pacific (World Bank, June 2023)
Realpolitik is back in fashion (did it ever go away?):
America’s lavish red carpet for Modi (Financial Times, 21 June 2023 – subscription may be required)
Oaktree favouring fresh capital and non-sponsored deals in a lender’s market:
The Roundup: Top Takeaways from Oaktree’s Quarterly Letters - June 2023 Edition
Some handy capital market assumptions for private assets on page 11:
Still Keeping It Simple: Mid-Year Update 2023 (KKR Global Macro Team, 21 June 2023)
If you have an article on Private Credit that you think is interesting, please send it to us at enquiries@zerobridge.com
First, apologies for the lack of Newsletters in the last few months. It’s been a busy first half 2023 for Zerobridge Partners as Hong Kong finally shook off its pandemic-imposed shackles and emerged blinking into the light of full global reintegration. With the drop of the mask mandate and other restrictions in early March, there has been a noticeable uptick in overseas visitors and the city's general mood, which can only be a good thing for businesses and the mental health of long-term residents.
So what has taken up our time? We’d sum it up in two activities:
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Spending face-to-face time with investors and partners across the region and beyond;
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Cultivating the strongest deal pipeline we have witnessed in five years of trading.
While this is, in one sense, just business as usual, both our travel receipts and our new advisory mandates demonstrate a gravitational pull to South East Asia (or ASEAN, to give the region its supranational title – we will use both terms interchangeably throughout). This Newsletter examines all things ASEAN and explains why the sub-region offers some of Asia-Pacific's most compelling near-term opportunities.
Allocators over a certain age will remember the heady days of the 1990s Asian asset boom and subsequent bust. Indonesia, Malaysia and Thailand were the high beta plays of the era, initially offering investors outsize returns through soaring financial markets before leading the way in the series of currency devaluations, balance of payments crises and rounds of asset price deflations commonly known as the Asian Financial Crisis (AFC).
While investor memories can be notoriously short, it has long been our sense that the events of this period have influenced global investor sentiment on Asia and ASEAN in particular. The region is still perceived as a higher risk than equivalent markets in southern or developing Europe. This view downplays the significant progress made by SE Asian central banks post-AFC in bolstering macroeconomic stability and structural changes implemented in legal frameworks favouring investors. The region will never be immune from global liquidity shocks but can weather them far better than in the past.
As we wrote in January, coupled with the much-delayed reopening of China, this has led to SE Asia being part of an asynchronous global economic cycle. This year, lacklustre growth in global goods trade is expected to weigh on activity, notably in Malaysia and Vietnam. The China recovery, which was hoped to support the broader region, is also fading fast. However, the continued recovery in tourism, boosted by an increase in tourists from Mainland China, should support growth in Thailand especially.
While the region is running at sub-optimal levels of activity, it is still showing positive economic growth and inflation is falling, albeit stickily in some cases such as the Philippines, due to the delayed pass through of increases in global commodity prices and domestic supply shocks. SE Asia remains vulnerable to any renewed food or energy shocks.
ZEROBRIDGE PARTNERS
Zerobridge Partners Asset Management Limited is focused on giving institutional & high net worth investors globally access to APAC alternative credit opportunities. The strategy seeks to take advantage of the less developed banking and capital markets in the APAC region and capitalize on our strong proprietary deal flow.
Zerobridge Partners Advisory Limited is a debt advisory firm focusing on raising new capital, creditor negotiations and debt restructuring for companies in Asia-Pacific. We come with deep investment banking experience and a strong track record across multiple credit cycles in Asia.
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Deal flow: Destination ASEAN
Source: Trading Economics, Data from 2000 to present
Similarly, economies in the region generally eschewed the West’s ultra-loose monetary policy experiments and, in the case of emerging Asian markets, tended to get their interest rate rises done early in this cycle.
Source: World Bank, Haver Analytics, Data from January 2022 to April 2023
Source: IMF, NL Analytics, April 2023
Geopolitically, ASEAN nations have preferred to maintain a balancing act in the face of China-US rivalry, simultaneously seeking to maintain or deepen economic ties with both, while seeking US support or collaboration in security matters. This balancing act has either been expressed explicitly (as in the case of Singapore) or more tacitly as geopolitical ambivalence in the case of ASEAN’s mostly non-aligned stance on the Russian invasion of Ukraine.
Even if we describe SE Asia as the ASEAN bloc, it contains a range of rich and developing, large and small nations with often diverse domestic populations and a wide range of historical experiences in dealing with China, Western colonialism and, more recently, the US as a superpower. Pragmatism and ambivalence when dealing with Great Power politics is a learned behaviour in this region and, in the most recent era of globalisation, it has proved effective. However, we are cognisant that, longer term, a deglobalising world is not necessarily favourable for ASEAN or Asia more broadly. No one really wants to choose sides.
The “little red dot” is flashing brightly…
Referencing one of investors’ greatest (perceived) hurdles to committing capital to Asia, Mr Lim discussed the “additional” legal risks involved in investing in emerging Asia. As regular readers will know, APAC Private Credit managers need to be exceptionally skilled in underwriting, structuring, and managing deals in these markets to ensure the ordinal priority of all credit investing – getting the money back.
Happily, Mr Lim has an app for that - Singapore itself, particularly its legal system, which private credit managers can tap on to originate and anchor their activities. As well as trusted and well-developed laws for contract, credit and security, agency and trust, and insolvency, Mr Lim highlighted what makes Singapore uniquely placed as a private credit hub for Asia:
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“Singapore was top, along with London in 2021, as the most popular seat to conduct international arbitration. We are valued for our neutrality in the region, and the Singapore International Arbitration Centre is the most preferred arbitral institution in Asia-Pacific in 2021.
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With more Asia-based investors and general partners seeking opportunities in the Southeast Asian region, it makes sense for general partners, investors and borrowers, to use Singapore’s laws and arbitration system as the governing law and jurisdiction for loan origination and documentation.”
Many European and North American LPs in attendance spent the next day and a half ruminating over the risks and challenges of investing in APAC Private Debt. However, from the Forum’s outset, the MAS was clear that they had your back when it came to structuring and legal risk. Singapore is positioning itself very much as a regional leader in this area. In 2017, they enacted a US Chapter Eleven-style bankruptcy law, which is recognised in the US and allows for all deals with a Singapore nexus to file there.
In our view, the dominance of Singapore (alongside competition from Hong Kong and London) as a legal venue for SE Asian private credit compares favourably in risk terms to structuring deals with borrowers via multiple European civil law jurisdictions. All our current pipeline is structured via one of these three common law venues.
We believe there are other reasons to take a positive look at the region versus Europe and the US at present. According to Oaktree, using Refinitiv data, US direct lending volumes dropped by 50% quarter-over-quarter in Q1 2023 to just $12 billion, the lowest level since Q2 2020: “This is partly because many sponsor-backed deals completed between 2020 and 2021 left portfolio companies with capital structures that now appear unstable given the 500 bps increase in base rates and rising leverage levels. Many private lenders are thus reserving capital to deal with issues in their existing portfolios instead of deploying it into new deals. Meanwhile, U.S. commercial banks are tightening credit standards, reducing lending volumes, and lending at higher interest rates that build in more cushion above their cost of funds.” In Asia, non-sponsored deals are the norm, which compares favourably to other regions where sponsor-backed deals predominate. The region therefore offers diversification by deal type in addition to diversification by geography.
Furthermore, we see APAC deals as more attractively priced relative to the global aggregate. Private Market Expected Returns generated by KKR at the end of May 2023 forecast the global private credit asset class to return 8.3% (net of Fee/Carry, excluding leverage) in US dollar terms. On the same basis we believe it is fair to expect senior secured APAC direct lending to non-sponsored SMEs to return several hundred basis points above that aggregate. Based on the same assumptions, expected returns for Asian private credit also compare favourably to global private equity over the next five years. KKR expect aggregate returns of 11.9%, which again is inside those expected from Asian private credit. For investors prepared to do the work, we believe there is a compelling risk-adjusted return proposition on offer.
Source: Trading Economics, Data from January 2019 to present
Amplitude and ambivalence: why is ASEAN attracting global capital?
Source: World Development Indicators, IMF October Outlook, Data from 2019 to 2022
Source: World Bank, Haver Analytics, Data from December 2019 to April 2023
Source: DSG Asia, 2023
Source: : IMF, fDi Markets, April 2023