The private debt industry in Asia-Pacific is rapidly gathering momentum – fuelled by opportunities arising from the ongoing market dislocation caused by Covid-19. Cameron Bunnell, Global Director of Analytics at Broadridge Financial Solutions, shares his unique insights into the growth of the asset class together with industry best practices around limited partner reporting.
Can you give us an overview of some of the main trends you are seeing in the APAC private debt market?
Assets under management invested in APAC private debt have steadily increased over the last five years. Between 2014 and 2019, APAC private debt AUM swelled from US$27 billion to US$57 billion. This reflects a wider global trend, with private debt now becoming the third-largest private capital asset class by AUM. The seismic growth in private debt AUM has been driven primarily by institutional investors, many of whom are trying to diversify their own return streams beyond fixed income and public markets, both of which have been badly stung by low interest rates and volatility respectively.
Why are investors so attracted to private debt?
The asset class has a solid track record of outperformance. More recently, the fundamentals underpinning private debt strategies have become increasingly compelling. This is because the pandemic has created a number of distressed debt opportunities at companies whose long-term business models are inherently strong but which are facing short-term liquidity or cash-flow issues. The crisis has also forced a number of APAC banks to scale back their lending activities allowing private debt managers to swoop in and fill the gap. As a result, we have observed more asset managers – including hedge funds – launch private debt vehicles as they attempt to capture greater investor wallet share. Broadridge anticipates this market dynamic will continue beyond Covid-19.
With asset managers moving into private debt, what do they need to consider from an operations perspective?
Fund managers and investors transitioning into private debt need to be cognisant that this is an illiquid asset class, and it needs to be managed differently from a strategy where the dealing frequency is more regular. It is vital that managers procure flexible technology solutions that can help them forecast their cash flows and conduct scenario analysis tests so that liquidity risk is managed properly. Liquidity risk management is something that market regulators and investors are taking incredibly seriously, so asset managers should take note.
What sort of reporting do LPs want from their private debt managers?
Irrespective of whether a manager is running a private debt strategy or not, investors want detailed reporting and look-through on their underlying portfolio investments. Increasingly, clients are demanding that detailed return metrics and analytics – replete with data visualisations – be provided to them in near real-time via their smart devices. As such, firms need to either strengthen their internal operations – a process that can be very expensive and time-consuming, or leverage external technology companies which have the scalability and expertise to help them. Even though investor demand for private debt is growing, there is still competition for assets and prospects will reject managers whose reporting processes are deemed inadequate.