Private Credit in Asia ex-China: A Fast Growing and Attractive Proposition for Investors

10 mins read

Asia is the world’s fastest-growing credit market, having grown almost 30 times in the last two decades, to over USD90 billion in June 2022. Yet, 80% of credit for businesses in Asia is still allocated by banks – significantly less than the proportion in the US and Europe[1]. This presents a huge opportunity for private credit and its investors – to provide customised financing solutions to the fast-growing mid-market corporate segment in Asian markets.


Global events in the last few years have led to a shift in the way global investors view Asia, with many looking beyond China and identifying opportunities in Asia through a pan-Asian lens, that is centred firmly on both India and Southeast Asia. The economic growth, credit market size, and the presence of diverse deal flows in these markets are priming to take the front seat when it comes to private credit investment opportunities.  


The case for India

Over the last five years, India has attracted the largest private credit investment (USD9.5 billion) among all Asian markets1, making it the second largest market in Asia after China. This uptick was driven by steady demographic-led growth in consumption and the significant strides made in the infrastructure sector.


India is one of the fastest growing economies in the world with a forecasted GDP growth of 6.3% in FY2024. India’s GDP is likely to be USD7.5 trillion by 2031, twice the size of the current GDP[2]and translating to an average incremental GDP addition of USD500 billion annually over the current decade. In addition to its market size, India’s allure lies in the strength of its financial market institutions, democratic form of governance, vast domestic market and commitment to economic reforms resulting in a steady and consistent deal flow of diverse investment opportunities across sectors.


The sheer breadth and depth of opportunities available from technology and manufacturing to infrastructure and consumer goods in the Indian private credit market distinguishes it from the private credit opportunities available in other emerging economies. The manufacturing sector only is estimated to grow three times in value by 2031 to USD1.490 trillion from the current USD447 billion[3]and the capital needs of such sectors represents hitherto a largely untapped opportunity segment for private credit investors.


Looking into Southeast Asia

Beyond India, there is untapped potential in the various markets that collectively make up Southeast Asia. The individual economies in the region might not be able to rival economic heavyweights China and India, but collectively, ASEAN has witnessed robust economic growth, reflected in its GDP expansion. Data from World Economic Forums suggests that over a ten-year period (2012 – 2022), ASEAN countries have accounted for 9% of global GDP growth – paralleled by the growth in the size of its banking and credit markets[4].


Experts in the region also recognise that investing in different markets brings forth different rewards. Though stronger as a region, the individual markets in Southeast Asia do vary in terms of size, maturity and therefore, emerging opportunities. Investors looking into Southeast Asia are thus able to adequately diversify and mitigate risks.


India and Southeast Asia, stronger together

According to a research report by GPCA, the increase in private credit transaction volume across Asia in 2022 was mainly driven by India and Southeast Asia. Similarly, the Alternative Credit Council also reports that while Asian private credit strategies make up no more than 7% of total global private credit, one third of managers globally intend to invest more in Asian markets over the next three years[5].


The Indian and Southeast Asia markets also possess several key enablers that contribute to their growth as large and attractive credit markets. One significant factor is the presence of a robust banking sector in both regions, providing the necessary infrastructure and financial intermediation for credit transactions. Advanced creditor rights framework reforms in India have improved the legal and regulatory environment, instilling confidence in investors and ensuring protection for lenders. The existence of established global players in the private credit landscape within these markets has also enhanced the attractiveness of investing in the regions. These players bring international expertise, best practices, and capital, all of which are steadily facilitating the development and expansion of private credit markets in India and Southeast Asia.


Asian jurisdictions currently rely mostly on their domestic banking systems to finance economic growth, but policymakers do realise the importance of a well-developed debt and private credit market to support the economic growth of the country. Government-driven initiatives, coupled with increasing awareness amongst borrowers about non-bank financing sources providing flexible financing solutions for growth, is leading private credit to embed itself as a mainstream investment opportunity. Furthermore, the private credit market is becoming increasingly attractive to investors when it comes to opportunities to access wider business networks, cross-border deal flows or corporates with broader regional footprint, allowing private credit investors to avoid “home bias” risks in banking that might cloud investment decisions.


Overall, it is without a doubt that the combination of India and Southeast Asia presents vast investment opportunities. As it stands, we are already seeing higher labour costs and an ageing population in China. The demographics in India and across markets in Southeast Asia are favourable and these economies will continue reaping dividends of a younger and growing population for decades to come.


India's position as the second-largest market, its diverse deal flow and breadth, coupled with Southeast Asia’s growing economies that are driven by a strong banking sector, creditor rights reforms, and the presence of global players, offer a robust and compelling investment landscape that hold immense promise.