22 Asian Legal Business | November 2024 increasingly competitive pricing while still exceeding their privately negotiated hurdle rates with investors. The competitive pricing, combined with greater flexibility in structuring deals, has made private credit an increasingly attractive option for borrowers, particularly in the underserved small and medium enterprises sector. Regulatory considerations Legal frameworks significantly shape the private credit landscape across Asia, with variations in acceptance and structure. “The threshold question relates to market access,” Brereton points out. “These vary widely across APAC, from countries such as Australia and Hong Kong which freely allow direct lending, to jurisdictions such as India, Malaysia, and South Korea where offshore financing often requires more careful structuring to comply with local regulations,” he says. While U.S. and European regulators have increased scrutiny of private credit, Asian regulators have generally taken a more measured approach due to banks’ dominance. “There is perhaps less of an immediate concern from Asia-based regulators as the source of debt funding in Asia is overwhelmingly provided by regulated banks (at least for now),” Seah explains. Brereton agrees: “There is far less evidence that regulators in Asian countries are scrutinising private credit as an asset class or considering the introduction of specific regulation in relation to the private credit industry.” In Singapore and Hong Kong, common law systems provide robust creditor protections and predictable enforcement mechanisms. This legal certainty has helped these markets Private Capital parts, Asian banks maintain large capital buffers and less complex loan portfolios, enabling their dominance. “Documentation terms have remained relatively robust, with stronger covenants and lender protections and far lower acceptance of the ‘trapdoors’ which have been used by sponsors in other markets to remove valuable assets from the credit net,” notes Andrew Brereton, Singapore office managing partner at King & Spalding. However, this banking landscape has created distinct opportunities for private credit providers, particularly in serving middle-market companies and sectors that face difficulties accessing traditional bank funding. The situation is particularly pronounced in emerging markets, where small and medium-sized enterprises account for a significant portion of GDP – reaching over 40 percent in some Southeast Asian countries – yet often struggle to secure traditional financing. The market’s evolution is particularly evident in its transformation from primarily special situations lending to a broader spectrum of financing solutions. “Private credit funds offer companies access to flexible capital which banks generally cannot provide,” says Brereton. This flexibility manifests in various forms, including high levels of (paid-inkind) PIK interest and preference shares with debt-like characteristics that qualify as equity for accounting purposes. For sectors that have become increasingly unbanked, such as mining and oil and gas, private credit has emerged as a crucial source of capital, filling gaps left by traditional lenders, Brereton explains. Further, the substantial amount of dry powder in the hands of private credit funds has led fund managers to offer Private credit surge Private credit is rapidly emerging as a viable alternative to traditional banking in Asia, adapting to regulatory challenges and meeting the demand for flexible financing amid increasing pressures on conventional lenders. By Nimitt Dixit In the evolving landscape of Asian finance, private credit is emerging as a powerful alternative to traditional banking. While private credit assets under management in Asia Pacific roughly doubled to about $120 billion by the end of 2023, this represents just 6-7 percent of global transactions, highlighting both the sector’s rapid growth and its significant potential for expansion. This growth is being fuelled by a convergence of market dynamics and structural changes in the region’s financial landscape. “A key factor for the orientation towards private credit is the higherfor-longer interest rate environment,” says Beelee Seah, Singapore-based banking and finance partner at Norton Rose Fulbright. This environment has effectively narrowed the pricing gap between bank-funded facilities and private credit funds, making the latter increasingly attractive to borrowers, Seah explains. Traditional banking in Asia accounts for over 80 percent of total credit, creating a unique market dynamic. Unlike their U.S. and European counter- • Private credit in Asia doubles, still room for growth • Flexible financing attracts borrowers in higher- interest rate environment • Local knowledge crucial for success in diverse Asian markets
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