ADM Capital recently travelled to the Middle East and Europe where our team attended SuperReturn in Berlin, meeting investors, and engaging on the Asia story. It was heartening to note that investors need little convincing of the merits of private credit as an asset class. Naturally, however, Western investors were curious as to why they should spend time understanding the complexity of distant Asia versus their home markets, which are also benefiting from higher returns due to rate rises.

As an Asia Pacific private credit manager with over 25 years of experience investing through various market cycles, our view is that now more than ever there is a compelling story of Asian pan-regional growth, lack of correlation to other global markets and an opportunity to achieve inherent portfolio diversification with the expanding Asian cross-border opportunity set. Fundamentally, a void exists that allows regional alternative creditors to be highly selective when structuring loans to SMEs, while at the same time there is a dearth of these providers with the right experience in local Asian markets, relationships and on the ground network.

Fuelling Pan-Regional Growth

In Asia, we are tremendously excited at the size of the potential opportunity ahead. Since ADM Capital’s inception in 1998, this is the first time that we have seen a confluence of uncorrelated, yet positive, growth trends yielding diverse investment opportunities in all of our core markets (Australia, China, India, South East Asia). Given the expanding populations and underserved nature of some of these markets, we believe the growth we are currently seeing is secular and long lasting in nature, making debt financing a compelling and efficient mechanism for these booming underlying businesses.

At a macro level, Asia is forecast to contribute 50% to world GDP by 2030¹ – Asia’s economic growth is a force to address. Asia’s population represents 60%² of the world’s total population – a proportion we expect to grow further.

More than half of the world’s total urban population resides in APAC³, with 60% of the top 20 largest cities by populus⁴ within the current ADM Capital target universe. It is estimated that ~$2 trillion per annum⁵ will be needed to fund infrastructure development alone in the region.

Other macro trends are driving a ferocious need for corporate financing. A rising middle class throughout APAC, which is set to increase by 73% by 2030⁶ from today will provide a vast appetite for consumer goods and services. An ageing population in certain large jurisdictions will increase the need for innovation in healthcare technology and access to elder care. The rapid adoption of technology in daily life (digital payments in Asia are projected to total $4.9 trillion in 2023, compared with $2 trillion in the US⁷) will drive the development and adoption of new banking apps and mobile wallets.

SME participation in this growth is significant with 97% of all Asia Pacific enterprises included in this group. SMEs employ 69% of the region’s workforce, contributing ~40-60% of GDP value, while the financing gap is estimated to be between $2-4 trillion⁸.

To engage with this opportunity there is a need for flexible alternate financing that can get comfortable with continually evolving, technologically driven industries and services, and a willingness to finance market participants with shorter track records. Long-term investors in the region with strong, wide networks across multiple jurisdictions and a presence on the ground who are flexible in their approach stand to benefit the most and offer the greatest value as lenders and partners.

Lack of Correlation – a Natural Diversifier

The APAC region represents a broad and varied range of opportunities. Post COVID, correlations across countries in the region and developed markets have further broken down. For the first time in many years, our core geographies, including Australia, China and Hong Kong, India and South East Asia are simultaneously firing on all cylinders, getting impetus from a variety of different core drivers.

The demand drivers in each of these markets range broadly from a COVID recovery in Thailand and Indonesia provided by a boost from tourism returning, to local micro-dislocations such as the lack of financing in South Korean real estate. This range of factors fuelling financing demand creates inherent diversification for a truly pan-regional investor, establishing Asian private debt as a must-have component in a balanced, patient and long-term investors’ allocation budget.

The Need for Cross Border Agility

The intra-Asia connectivity and increase in “near shoring” that we have discussed in earlier Insights is not conducive for traditional funding channels, further underlining the need for alternative managers in Asia. The key risk for the region is that funding will not grow fast enough to keep pace with underlying demand to allow a healthy and vigorous secondary market to develop. We believe increasing interest in the region from global investors should address this over time.

Our long-held view is that a relative value approach that maintains flexibility across the region, with deep networks in each local geography, enables ADM Capital to be nimble and focus on the most compelling risk-reward whilst remaining proactive, focusing on top-down, local market dislocations. A brief review of the current opportunity set in each of our core markets is noted below:

• In Australia we are seeing a broad opportunity set in the carbon market from carbon sequestration project financing. There is a well-defined, regulated and large scale carbon-offset market supported by the Australian government. Our in-house expertise and local on-the-ground team initiated our maiden investment in a project and have a large pipeline to action once proof of concept is demonstrated.
• India has numerous underserved markets and therefore strong domestic demand for private sources of credit in many areas, impervious to global macro uncertainties. In recent years, the “Make-in-India” strategy has seen significant uplift as global players try to diversify their supply chains. ADM Capital funds have recently financed several services companies (consultants, logistics, fintech, PropTech, EdTech) with a global customer footprint who access a lower cost and higher skilled workforce base in India. This trend is manifest most recently as we currently look to help finance the acquisition of an Indian manufacturing company by experienced foreign investors.
• In China, in contrast to historic track record, economic growth is relatively muted when compared with the rest of the region. We are focused on firms working on improving liveability of cities given the ongoing and vast urbanisation rate. We have financed defensive and core, government-aligned sectors such as eldercare, smart infrastructure, private car park operators and data centres located in Tier 1 cities. We have also been active on short-dated, real estate-backed bridge financings in Hong Kong, as well as onshore deals where Hong Kong collateral is being pledged as security.
• South East Asia continues with the COVID-recovery theme – with hospitality assets, medical tourism, cargo and logistics being a focus. There are several opportunities to finance the development of ‘smart cities’ in emerging and frontier economies, for example in Vietnam where we financed the expansion of a cold storage facility and logistics operator, as well as a modular housing manufacturing business focussed on facilitating quality urban infrastructure. The cross-border dynamic plays out particularly well in South East Asia, with borrowers domiciled in countries such as Singapore or Malaysia servicing the broader region.
• Even in more opportunistic developed North Asian markets such as Japan and Korea we review special circumstances that are a play on the above themes and are unable to find traditional funding, most of them in the real asset space.

The ADM Capital Approach

Across the region, regardless of local market dynamics, private credit funds can focus on looking for borrowers with strong and predictable revenue prospects, and underbanked, mid-sized companies that require creative, cross-border solutions to achieve their growth plans.

Disintermediation in the Americas has resulted in only 20% of corporate financing being financed by the banks vs. 50% in Europe and 75% in Asia⁹. Given the ongoing disruption in most business models and in most industries, we expect that traditional bank financing will no longer suffice in supporting the huge demand that we see today, and that the trend in Asia will increasingly move towards that of private, flexible finance, as we have already observed in the US and Europe.

ADM Capital’s deep network of relationships and experience across market cycles provides us with the capability to be nimble, creative, and flexible in the financing of these opportunities. With over 200 private loans executed since inception and a team of more than 40 professionals positioned across the Asia Pacific region, the ADM Capital team remains eager and excited to add to this story.

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¹ World Economics, June 2023
² Our World in Data, June 2023
³ UN-Habitat, June 2023
⁴ World Population Review, June 2023
⁵ Asian Development Bank, “Meeting Asia’s Infrastructure Needs”, Jan 2022
⁶ Brookings Institute, Jan 2022
⁷ Statista, June 2023
⁸ Global Solution Consulting, June 2022
⁹ Alternative Credit Council, “Private Credit in Asia”, July 2020