As one of the world’s largest subregions, Southeast Asia is home to more than 650 million people, accounting for ~8.5% of the global total population. The region consists of 11 emerging economies that have consistently demonstrated booming economic growth driven by exports, consumer spending, rapid urbanisation, improving infrastructure and digitisation.
Collectively, the region is the world’s fifth-largest economy and has become a significant destination for foreign direct investment (FDI), attracting US$224 billion in 2022. From 2012-2022, its economy grew by an annual growth rate of 4.2%, with 4.7% growth forecasted for 2025. As nations focus on moving up the value chain to higher value-add industries, Southeast Asia is poised to become a more prominent and dynamic driver of global growth and a key beneficiary of intra-Asia trade dynamics.
However, effectively navigating the distinct legal, political and currency systems in such a diverse region requires trusted local networks and relationships, supported by a tried and tested investment process.
Annual private credit allocations to Southeast Asia reached US$65.4 billion in June 2022, up 52% from US$43.1 billion in 2020, as reported by Preqin. Although this constitutes a small fraction of global activity, ADM Capital perceives this as a sign that borrowers are becoming more familiar with private credit as a financing solution, and the regulatory environment is evolving to accommodate more complicated private credit loan structures.
Increasing Credit Demand
In recent years Southeast Asia has positioned itself as a vital global manufacturing hub, driven by increased FDI and rising export volumes, particularly in countries such as Indonesia and Vietnam. As manufacturers diversify their supply chains via a “China Plus One” strategy – there is growing demand for enhanced logistics and transportation infrastructure to support this expansion. Infrastructure investment in the region has been significant, yet a gap of around US$60 billion exists for anticipated trade flow requirements, creating opportunities for private credit investors to finance this infrastructure deficit.
With governments offering tax incentives, grants and benefits to encourage foreign investment and business growth, the demand for tailored and flexible alternative capital solutions from corporates in new economic sectors will continue to grow.
Local nuances add complexity to the opaque private lending market. In comparison to banks and traditional lenders, private credit funds have flexible mandates, allowing fund managers to provide loans with varying levels of risk. In Southeast Asia, this has allowed ADM Capital to address the varied financial requirements of borrowers, providing tailored solutions that capitalise on favourable risk-adjusted opportunities across the region.
Insufficient Capital Supply
Bank lending growth, despite contributing 80% of corporate financing in Asia Pacific, is largely inaccessible for Southeast Asian SMEs, with 70% of SMEs supporting their business with personal savings or family and friend financial support. Funding from traditional banks represents only 23% on average, with Malaysia having the least bank interaction with 17%.
In the current market, borrowers are accepting higher costs – including higher interest rates and broader collateral packages – to secure financing quickly and efficiently. For an institutional allocator, APAC private credit provides a naturally diversified exposure and private equity-like performance, supported by over-collateralisation and excess downside protection.
Responding to the shifting landscape, we have observed a significant increase in restructuring and workout enquiries in our regional pipeline over the last twelve months. Despite this, we continue to prioritise growth and acquisition financing.
A Closer Look: Southeast Asian Countries in the Spotlight
Southeast Asia represents a core allocation for ADM Capital. Our assessment of attractive market factors and a strong private credit pipeline suggests a continued ability to diversify across markets, supporting the creation of portfolios characterised by a low correlation with other asset classes.
Currently, Vietnam is benefitting from ongoing US-China geopolitical tensions and global supply chain shifts. Free trade agreements and demographic advantages continue to support its competitive labour and manufacturing capacity. ADM Capital has reviewed a significant volume of private lending opportunities here over the last few years but continues to be very selective, only executing deals that offer an appropriate risk-return profile, supported by robust borrower fundamentals.
For example, we recently financed a Vietnamese-based corporate that designs and manufactures modular housing units for use in the affordable housing markets in New Zealand, Australia and the UK. We provided senior and mezzanine credit, along with structured access to onshore and offshore collateral, benefitting from emerging market growth and developed market risk mitigation in more developed Asian markets. The hospitality sector in Vietnam is also booming given its visa-free access and improved connectivity – a sector where ADM Capital’s has also been active.
In November, ADM Capital’s Founding Partner, Chris Botsford, contributed to a panel in Hanoi arranged by the University of Exeter and Dragon Capital to discuss ‘Fostering a Biodiverse Economy in Vietnam’. Vietnam is one of the most biodiverse countries in the world. Chris joined economists, government officials, asset managers and investment partners in Vietnam to discuss how finance and public policy can be harnessed to mitigate biodiversity loss and foster Vietnam’s green economy of the future.
Malaysian borrowers are increasingly embracing private credit, looking beyond familiar private equity and Southeast Asian family office channels for alternative credit solutions. This shift follows regulatory changes that exempt foreign investments over MYR100 million. Since re-entering the market in 2022, ADM Capital has seen an active pipeline, particularly in the hospitality and entertainment space, as well as in industrial real estate and manufacturing. Malaysia is a prime beneficiary of intra-Asia trade, in part because of the long-standing presence of an Indian diaspora that has thrown up numerous cross-border opportunities in the manufacturing sector between the two countries. In addition, Malaysia is developing as an offshoring centre for technology-based investors in China and has become Southeast Asia’s logistics hub, with ADM Capital previously investing in two deals related to this thematic. By virtue of geographic proximity, Malaysia also serves as a lower-cost alternative to Singapore, particularly in services – ADM Capital is currently exploring an opportunity in the entertainment services space.
The commodity surge which boosted Indonesia’s economy in 2023 is abating, with growth now expected to be driven by domestic consumption recovery and CAPEX expansion. The Bank of Indonesia has prudently managed rates and a cut toward the end of 2024 is expected. Following a period of political uncertainty before the Q1 2024 elections, Indonesian banks are now becoming increasingly competitive and are broadening their lending universe to compete in the high-yield space.
Indonesia is aiming for advanced economy status by 2045, when it is expected to become the world’s fourth-largest economy and policies are expected to support increased consumption, export-orientated manufacturing and infrastructure development. One of the primary objectives of Indonesia’s sovereign wealth fund – the Indonesia Investment Authority – is to allocate capital to key sectors including logistics, digital infrastructure, healthcare and green energy. This initiative recognises the country’s significant infrastructure deficit by leveraging “Smart Capital” to promote knowledge and technology transfer, and reflects a broader trend toward “smart city development” across emerging Asia as governments prioritise domestic growth and consumption that is equitable and sustainable. ADM Capital has recently invested in the hospitality sector, and is considering further investment in the food and financials sectors that will support this megatrend.
Relative to other Southeast Asian economies, Thailand has reported modest growth, forecasting only 2.8% GDP growth in FY2024 driven by a tourism industry that is slowly recovering and export improvement. There is pressure on the Bank of Thailand to cut interest rates as the Thai banking sector continues to struggle due to elevated credit costs and weak pandemic-era loan performance. However, the hospitality industry is optimistic, evidenced by a 44% year-on-year increase in foreign tourist arrivals, and is targeting a record number of visitors this year. The sector offers investment opportunities in distressed hospitality assets and healthcare-related tourism projects, with Thailand increasingly recognised as a destination for medical care. The government’s ongoing efforts to facilitate tourism through bilateral visa exemption agreements further support this growth. Thailand, along with other Southeast Asian nations, will benefit from an intra-Asian growth surge, fostering development in secondary urban centres through expanded industrial infrastructure. ADM Capital is considering numerous opportunities in this space.infrastructure. ADM Capital is considering numerous opportunities in this space.
The Philippines achieved GDP growth of 5.6% in 2023, ranking among the fastest-growing economies globally, with projections suggesting a potential doubling of GDP from US$400 billion in 2022 to US$800 billion by 2030. This growth is driven by significant advancements in transportation, construction and financial services, supported by increased infrastructure spending and a rapidly evolving digital financial landscape.
The robust economy is further underpinned by a narrowing trade deficit and stable inflation, with the latter expected to stay within the 3.2-3.6% range in 2024, attracting foreign direct investments in the technology and manufacturing sectors. Additionally, the government’s renewable energy initiatives, particularly in the solar PV sector, align with global sustainability trends – a key focus of ADM Capital’s investment strategy. The launch of green energy auctions and regulatory changes to attract investment are set to boost the renewable sector, which is targeting a 35% share of domestic energy generation by 2030. Like other emerging Asian economies, the Philippines will need to accelerate its smart city infrastructure investments to harness the growth potential of its economy. ADM Capital has invested in and is examining various opportunities in this area, including hospitality and city gas distribution, among others.
Conclusion
Whilst there are many nuances to consider when conducting business across these markets, all Southeast Asian economies are shifting to harness the powerful, transformative forces of urbanisation, technological innovation, intra-regional dependency and climate change. Mid-sized companies in this region are seeing near-term opportunities to achieve sustainable growth, but face funding difficulty from conventional channels due to a variety of reasons. These include the specialist nature of their product and service offerings, the complexities arising from cross-border linkages and a lack of relationships with traditional funding institutions given their size and/or track record. We will continue to target companies in the region expected to drive these structural changes and expect Southeast Asia to be a core focus for 2025.
