India is expected to see an ongoing uptick in private credit lending, driven by investments from private equity sponsors in the country, panellists said at the AVCJ Private Equity Forum 2024 in Hong Kong this week.

The rise in majority stake acquisitions by PE firms in India is driving the increase in private credit lending in APAC, with structures such as unitranche financing gaining prominence, according to Toby Damek, a partner at Ares Management, during the panel session.

India has historically seen private investors acquire minority equity stakes. The recent shift towards majority stake acquisitions followed by successful business operations and exits is instilling confidence in the market, said Damek.

Damek said the trend makes India more conducive to private financing, particularly for structures like unitranche. Hence, India is poised to become the next significant market in this evolution, according to Damek.

Australia, the leading private credit market in APAC, is set to witness even more unitranche transactions, a popular financing structure in the US and Europe, as per the observation by Damek.

“In Australia, I think the very first one was done in 2017 and now it’s several billions every year that are getting done in the unitranche format. That is a positive development,” said Damek during a panel discussion.

In addition to India and Australia, private credit lending is growing in Southeast Asia, as noted by Andrew Schantz, partner of private credit at Bain Capital, during the panel discussion.

Vietnam, Singapore, Malaysia, Thailand and Indonesia, although small markets, have also seen private credit deal flow, according to Bain’s Schantz.

In the past 24 months, a handful of direct-lending transactions have emerged from Japan, where bank financing is predominant and notably cheap, said Schantz.

Schantz added that private credit complements bank financing in APAC, except in Australia, where it has largely replaced a significant portion of bank capital over the past 15 to 20 years.

Distressed no more, what’s next?

Prior to 2022, private credit funds in Asia deployed their capital towards distressed debt, notably for Chinese developers. Following the collapse of China’s real-estate giants, private credit investors shifted their attention to private equity sponsors.

Only one or two out of 20 to 25 positions in their portfolio are expected to sit in stress or distressed situation credits and it will usually be post-debt restructuring, according to Christopher Mikosh, co-founder at Tor Investment Management, during the panel discussion.

Damek from Ares anticipates that lending to private equity sponsors will evolve as a key driver of demand for private credit in APAC.

With challenges mounting for PE firms hoping to exit their investments in the region, the opportunity to lend against their existing portfolios to provide returns to LPs emerges as a promising avenue for private credit lenders to explore.

“We are exploring an NAV facility for a sponsor that wants to continue to invest in a portfolio – lending against the net asset value of the current portfolio to enable them to draw down some of their capital and continue to grow their portfolio companies,” said Ares’ Damek.