Can private credit help to bridge Asia’s funding gap?
It has become fashionable to describe private credit as an opaque and fast inflating bubble that could bring crisis to the global financial system. But in Asia even banks and regulators hope it will grow to bridge the yawning financing gap.
Yes, the asset class has grown rapidly: from roughly $500 billion of assets under management in 2014 to around $1.7 trillion today, with Preqin projecting $2.3 trillion by 2027. And higher rates are a threat to borrowers of floating liabilities, which is the form for all manner of private and direct lending by non-banks.
Could managers that have raised big private debt funds with the promise of high returns for moderate risk have built up concentrated exposures to the wrong sorts of borrowers in their rush to deploy them?
Last November, before the US Federal Reserve came out with its December forecast for 75 basis points of rate cuts in 2024, Jonathan Bock, co-chief executive of Blackstone’s Business Development Companies (BDCs) and global head of market research for Blackstone Credit, noted that nearly 20% of the private credit market would have an interest coverage ratio of below 1 times at 5.5% forward base rates.
In plain English: these businesses wouldn’t produce enough cash to service their debts.
MAS will continue to partner private credit managers with strong track records that are keen to anchor their regional headquarters in Singapore, through our private market programme
When interest rates were low, few borrowers even thought about hedging rate risk on their liabilities.