Chinese New Year of the Tiger celebrations feel distant in Hong Kong as we navigate the first serious wave of Covid-19 infections. Nonetheless, we are hopeful that 2022 will prove successful for our private lending strategy as the region’s economies rebound from their own Covid-19 restrictions and domestic and international travel resumes.

OPPORTUNITY SET

A unique opportunity for private credit exists in Asia today reflecting the credit supply/demand imbalance. Demographic factors including younger and growing populations, substantial infrastructure needs and rapid digitisation of economies are demand drivers. Furthermore, the growing intra-regional trade and acquisitions require specialist funding. Against this backdrop, most mid-market companies that form the backbone of the economy, are reluctant to dilute equity stakes and prefer growth through shorter term debt financing. Simultaneously, we are seeing diminishing supply of traditional financing channels with global banks repatriating capital back to home markets and generally hunkering down on existing business in a bid to save costs and improve their flexibility.

Notwithstanding the strong underlying market trends, 2021 was a difficult year in that demand for funds remained hard to predict, influenced by a combination of new Covid-19 variant waves, differing vaccination levels and the openness of borders. Such flux will likely continue in 2022, making it imperative to remain flexible in accommodating such unpredictability and to capitalise on the opportunities therein.

THE ADM CAPITAL APPROACH

ADM Capital’s 23-year track record across an array of boutique structured credit and special situations in diverse markets across Asia Pacific has guided and enabled an agile approach to funding; providing idiosyncratic solutions that are tailored to suit the needs of each of our investee companies.

While the USA and to an extent Europe remain dominant in the private credit market in terms of assets under management, Preqin expects overall credit AUM in Asia-Pacific to grow at a CAGR of over 20% by the end of 2025¹. This abundance of liquidity could overwhelm our markets; however, given the increasing funding gap faced by mid-sized borrowers, we expect lenders will retain negotiation room, allowing downside protection to remain strong. Pricing power is mixed across regions, influenced in some cases by regulation and others by market participants. For instance, domestic onshore participants have an advantage in being able to price in local currency, which can have an impact on the IRR rates achieved but suffer from the inability to provide flexible structures and larger loan sizes.

In the past 12 months. ADM Capital has committed and deployed around USD730m (including co-investments), garnering double digit yields with an average tenor of 2.5 years. Despite the pandemic hampering our ability to travel, our local networks of auditors, financial advisors and consultants remained a strong source of new deals, whilst discussions with known and trusted promoters with whom we have conducted business with previously were a preferred source of deals. We were able to leverage our local networks on the ground to help with due diligence efforts, as well as to staff various teams in our portfolio companies. To mitigate the effects of the pandemic, ADM Capital’s strategy was to focus on “Covid-positive” and “Covid-neutral” industries such as logistics, disruptive technology and professional services; to capture real estate opportunities with an assured demand story, and otherwise to target fundamentally sound businesses with the ability to weather short to mid-term disruptions.

In parallel with ADM Capital’s active search for new investments and the deployment of capital, in 2021, ADM Capital exited over USD230m of investments across various markets including Australia, Korea, Thailand, China and India. Our exits achieved an estimated weighted average gross IRR of 17.5%, a cash-on-cash multiple of 1.24x and were held an average 23 months.

Our insistence for tight financial covenants, governance via board seats, cash and performance monitoring reports and frequent correspondence with borrowers has proved important during the downturn. ADM Capital also underwrites to multiple possible exit scenarios, ensuring flexibility as maturities approach or businesses negatively deviate from projections.

Looking ahead, while we expect to continue to see a number of real estate related lending opportunities across Asia-Pacific, we see demand across a wide array of sectors including infrastructure, transport, logistics, telecoms, technology and professional services. In the wake of the pandemic, the importance of allocating capital to impactful sectors has become even more poignant – ADM Capital will continue to look for opportunities in food and agriculture, healthcare, and renewable energy. In terms of end use of funds, ADM Capital has always strived to provide flexible solutions and supports a variety of funding needs, including acquisition financing, bridge or completion financing, refinancing and special situations that cannot be funded by traditional channels – all our traditional geographies continue to show opportunities in this space. In addition, Covid-19 has caused disruptions across companies, sectors and geographies; now more than ever, entities will need rescue capital as the two-year mark fast approaches.

SUSTAINABILITY OUTCOMES

Having participated in Asia-Pacific’s strong growth over the past two decades, ADM Capital has witnessed increasing Environmental, Social and Governance (“ESG”) risks across investment opportunities. We thus moved to integrate ESG considerations within our investment and risk management process. Our view of ESG risks has evolved from risk mitigation to value-creation, and we have begun recording the positive impacts enabled by our capital via key performance indicators, while also carefully analysing our investee companies’ adaptability to climate related risks. Although we are still in the early phases of ESG KPI performance data collection, we have achieved a 95% reply rate showing improvement across the board. Many believe that the shorter tenor private credit funding makes it challenging to incorporate a comprehensive sustainability agenda in portfolio companies; we however, make use of our engagement with borrowers, and board seats when we have them, to encourage borrowers to establish ESG targets and stretch goals which hopefully will have lasting and meaningful impact, even after we exit our positions. Design of a carbon emission calculator by a freight forwarder, achieving an EDGE rating from a property developer, provision of more affordable services to an underserved population are just some examples. ADM Capital will continue to pursue this agenda into the next year and beyond as it is evidenced that sustainability efforts support portfolio companies’ bottom-lines and ensure long-term growth.

ADM Capital was founded in the Year of the Tiger in 1998. In the Chinese zodiac, Tigers are known to be assured and independent creatures that foster confidence. Reflecting on 2021 and the continuing trials we are facing globally, our solution-oriented approach and ability to deal with complexity ensures we are well placed to welcome the opportunities and challenges that 2022 may bring. We are hopeful that this year will prove a fortuitous and healthy one for ADM Capital and our investors, and that our assuredness in our underwriting principals and investment process will continue to prove successful.