Intra-Asia connectivity is growing at a tremendous pace and traditional financing channels are lagging demand. We highlighted this Asia-for-Asia theme as a core driver of the regional financing opportunity in our 2023 outlook. For this quarter’s insight we look at both the conventional and non-traditional drivers fuelling this trend.

• Broad Range of Economic Development Across the Region: Asia’s mix of frontier, core emerging, and developed markets make it a broad and deep opportunity set to source credits, benefitting from varied market nuances and dislocation, supported by long-term growth trends. The APAC share of world GDP grew from <27% in 2000 to over 35% in 2021 and is projected to grow further to 40%+ by 2040, and 50%+ by 2050. While this is largely driven by China and India, consumer markets in populous nations like Indonesia (the fourth largest population globally), the Philippines and Vietnam will also contribute to this growth.
• Asian Domestic Consumption Accelerates: Asia is decidedly moving away from export-led growth to a domestic consumption focussed, demand-led market following increased digital connectivity, improved infrastructure, and the emergence of an economically stronger middle class. The World Economic Forum predicts that India and China alone will add over 750 million consumers who will spend over USD11 per day between 2020 and 2030 vs. the US that is projected to add just 24 million consumers^[1] of similar spending bracket. CBRE forecasts that Asia will account for 90% of the growth in global online shopping between 2021 and 2026, which will require 100-130 million sqm of additional logistics real estate. China has driven the majority of consumption in Asia over the last two decades, resulting in the region’s share of the global consumer class increasing from 20% to 50% throughout this period. The next decade is expected to see growth in South Asia, which is forecast to account for 40% of new entrants into the global consumer class by 2030, an equivalent USD10 trillion of expenditure. ADM Capital has used these trends to our advantage by investing in cargo and logistics operators in the region to support this consumption acceleration, with another example involving a Malaysian engineering services business that has expanded its services across Asia.
• Increased Regional M&A Activity: M&A activity in Asia has been sporadic over the last 20 years, with regional pockets of activity. We see the private equity asset class maturing, and activity picking up across the region with 648 transactions totalling USD403bn in value executed in 1H2022[2] (of which 77% was domestic and attributed to Asian acquirers buying Asian businesses, according to an E&Y report) compared to an average of USD583bn executed annually between 2015-2019, according to Bloomberg data. ADM Capital is looking to provide leverage in these transactions particularly involving cross border M&A, given our presence in most of the countries in Asia. For example, from recent ADM Capital activity, the acquisition of an entity with manufacturing facilities in India by a professional sponsor group in North America, and another transaction involving the sale of a sizeable equity stake in a financial sector player in a South Asian frontier market to an overseas Asian conglomerate, highlight the prevalence of this theme.
• Conventional Funding Patterns are Changing: The developed markets of Asia that traditionally invested in Western economies are increasingly looking closer to home and are becoming more comfortable investing across emerging Asian markets, which fuels a rise in cross border financing demand. This creates unique opportunities for regional alternative credit providers who can operate across languages, legal environments, and cultures. For instance, Japanese companies invest actively in South East Asian markets, and more recently, are investing in smart city infrastructure in India. Simultaneously, investors from developed Asian nations including Australia, Korea, Japan and Singapore are now investing more actively in Asian opportunities both directly and through funds. As this trend accelerates, liquidity and funding diversity in the region has expanded, contributing to an improvement in the credit quality of borrowers and therefore increased confidence from private debt markets.
• Diversification of Supply Chains with Nearshoring as a Key Requirement: Whilst the initial impetus was the US-China trade dispute, subsequent events such as COVID related supply disruptions, concentrated supply chains, higher energy prices, and Asia’s own consumption story, have increased opportunities in supply chains across the region. HSBC polled 450 corporates across APAC and found that they will base over 50% of their supply network within Asia, up nearly 6% from 2020. Anecdotally, we have seen Southeast Asia ramping up manufacturing facilities in automotive EV to supply China, Japan and Taiwanese companies. India is also increasing the production of active pharmaceutical ingredients and smart phone and electronics component manufacturing.

Access to dependable supply chains has become a critical need in all markets today. For example, ADM Capital provided financing to allow the New Zealand government to access modular housing components from a Vietnamese manufacturer. Similarly, we invested in a Singapore headquartered company to facilitate the growth of their freight forwarding services across Asia while accessing qualified manpower in India to establish their digital footprint. We have reviewed opportunities to finance manufacturing in frontier and lower cost economies like Bangladesh, Sri Lanka and Vietnam as multinationals seek to diversify their sourcing channels.

• Increased Economic Partnerships and Trade Blocs: Globalisation trends of the last decade are being replaced by regional partnerships reflecting both political and commercial considerations. Numerous regional trading blocs are being formed, including APEC, QUAD, RCEP, and CPTPP, eliminating tariffs, fostering free trade and intensifying economic partnerships, commerce and capital flows within the region. Annual inward FDI flows across the ASEAN region were up 45% from USD175bn in 2021 vs. USD120bn in 2020, driven by the rebound in manufacturing, supply chain diversification efforts by multinationals, investment in infrastructure and the digital economy.

To engage with this opportunity, capital providers should be experienced in navigating the idiosyncrasies of the legal, regulatory, and cultural aspects of complex cross-border transactions.  Our presence and deep relationships in these markets, which date back to 1998 when we began investing in Asia Pacific credit, provide access to a strong pipeline of opportunities and the region’s leading SME’s, entrepreneurs and family-run businesses. Being fast, flexible and creative is essential when providing cross-border solutions in support of this intra-Asia trend, and ADM Capital relies on our 25-years of experience in the region to ensure downside risks are minimised.

With 189 private loans executed since inception and a team of over 40 professionals positioned across the region, the ADM Capital team is excited for the opportunities ahead. Should you have any questions, please email us at admir@admcap.com.

[1] Asia’s consumer class is growing. This chart shows how. (World Economic Forum)

[2] Asia-Pacific M&A activity remains robust in 2022 as companies look to accelerate their transformation. (EY)