Private Credit Opportunities

in Asia Pacific
Private Credit in Asia: Filling the Void
October 2023
 Table of Contents
1 Executive Summary

A Case for Private Credit

2 Investing in Asia Pacific

Key Challenges for Asian Private

3 Credit Managers

Asian Private Credit - Defining

4 the Opportunity

Relative Value for Private Credit

5 in Asia Pacific

6 Conclusion

Unwinding the Market’s Clock: Opportunities in Commitment

Timing 2
Executive Summary
• In Asia Pacific (APAC), there is a sizeable funding gap • Due to the continued demand for capital, coupled
arising from rapid demand growth and structural with selective bank retrenchment, a manager with
inefficiency in credit supply, which is dominated by flexible capital and scale, able to provide a
banks (77%). Many banks are increasingly unable to one-stop financing solution, can often extract
meet the funding needs underpinning the region’s superior economics including cash and accrual
economic growth due to (i) a large share of bank lending interest, fees, non-call premiums and potential
being prioritized for certain policy-favored industrial equity upside. At the same time, lenders can benefit
sectors, (ii) loan books of many banks and non-banks from very tight protections, including robust covenant
being hampered by unresolved non-performing packages, tight documentation and asset collateral
exposures, and (iii) in some cases, banks needing equity (often ~50% loan-to-value).
injections from governments. Similar to the U.S. and
• Private Credit providers in APAC offer capital
Europe, we believe that the selective retrenchment of
solutions in three categories:
banks is further underpinned by renewed banking sector
◦ Sponsor direct lending – Provides financing to a
anxiety, tightening credit conditions, and increasing
private equity sponsor enabling them to acquire
regulatory constraints, creating sizeable funding gaps
a majority or controlling equity interests in a
in APAC. We believe this market dynamic will present
business or to make value-enhancing changes
attractive growth opportunities for alternative private
to a portfolio company.
capital providers.
◦ Non-Sponsor corporate direct lending – Provides
• At the same time, demand for credit financing will loans to corporates that do not exhibit financial strain,
increase driven by continued rapid economic growth but need capital for general operations, business
in APAC. APAC’s GDP growth over the coming years is expansion or strategic acquisitions.
estimated to contribute 52% of global GDP in 2030, up
◦ Special Situations/Distressed Debt – A more
from 45% as of September 2022.1
flexible mandate that invests across the entire
• The funding needs and liquidity pressures faced by capital structure of a potential borrower, whether
many corporates and sponsors across APAC have by providing new primary capital or by acquiring
been exacerbated by recent developments causing existing instruments in the secondary market. The
volatility and increased conservatism by some strategy often focuses on low entry valuations due to
funding providers – recent shocks, including COVID-19, dislocations in the market or at the borrower level.
a sharply rising interest rate environment, the China real • We believe the APAC region offers attractive risk
estate crisis, and most recently a confidence crisis in the adjusted return opportunities for those investors
global banking sector caused by U.S. and European bank who have the right team, right infrastructure, and
failures, have impacted funding available for corporates right approach. Demand for funding solutions is
and sponsors. As a consequence, capital markets for increasing rapidly and the penetration of credit
equity and debt have remained largely shut as a funding investors is relatively low at this stage of market
or exit option, leading increasing demand for alternative development, as a result, GPs with effective local
financings in the region and allowing investors to focus origination platforms and local know how can take
on more attractive risk-reward opportunities, with better advantage of market inefficiencies by sourcing
counterparties, and enhanced terms and covenants. opportunities with relatively limited competition.
• Managers have to be able to navigate the more • Finally, APAC Private Credit offers significant
complex market structure in APAC, encompassing diversification benefit to LPs.2 Economic drivers and
several very different jurisdictions, business business cycles in the APAC region are very differentiated
communities and legal frameworks, the APAC Private from those in the U.S. and EU, resulting in low correlation
Credit market has higher barriers to entry. These limit to the asset class in developed markets.
the intensity of competition in APAC, leaving experienced
managers who are able to take advantage of these barriers
to seek attractive risk adjusted return opportunities,
comparing favorably to those in developed markets.

1. World Economics, Share of Global GDP – Global. Data as of December 2020.

2. Diversification does not assure profit or protect against market loss.

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Timing 3
A Case for Private Credit Investing in
Asia Pacific
Current financing channels in APAC are dominated by One of the reasons for APAC’s heavy dependence on
bank lending, which is becoming less effective in banks is that the public capital markets in the region are
meeting the growing demand for financing and is much less developed than those in the U.S. and European
heavily concentrated in specific geographies and sectors. markets. While APAC accounted for 39% of the World’s GDP
The resulting limitations represent a growing opportunity in 2020, the region’s bond market accounted for only 10%
to be addressed by Private Credit, which has already of international bond issuances. Comparatively, the U.S.
displayed rapid growth over the last five years. and Europe accounted for 31% and 23% of the world’s GDP,
respectively, with their bond markets accounting for
1. The State of the Current Financing Channels 49% and 41% of total international bond issuances.5
Corporates and businesses in APAC have been accessing
credit through three channels: banks, public markets 2. Private Capital Underpenetrated in
and private markets. In contrast to the U.S. and Europe, Asia Pacific
banks represent the dominant funding channel in APAC, Similar to corporate bonds, private capital is less
with c. 77% of all financings provided in 2020. The U.S. developed in APAC. Private Equity in APAC accounts for only
and Europe have gone through a sharp decline in their 13% of the global Private Equity capital.6 Even more skewed
dependence on banks. For example, within the syndicated is the situation for Private Credit in APAC, which accounts
leverage loan market in the U.S. and Europe, on average, for only 11% of Private Credit capital.7
banks only provide balance sheet financing for 20% and
12%, respectively, of the transaction volume arranged for 3. Heavy Concentrations in Several Financing
by banks.3 Channels Create Opportunities
Several existing financing channels in APAC, including
Fig. 1: Asia Pacific Financing Activity by Type, 20204 bank lending and high-yield bonds (“HY”) are heavily
concentrated in specific geographies and sectors,
making these funding channels fragile and subject
3% 2% 0.1% (Private Debt) to pullbacks when individual geographies or sectors
experience shocks. In contrast, we expect the stability of
capital provided by Private Credit to drive further adoption
18% by borrowers seeking alternatives to bank financing.8
Bank Loans
Public Debt Specifically, Asian USD HY is dominated by mainland
China (46%) and India (24%). The market is also heavily
Public Equity concentrated in the Real Estate sector (34%), with
Private Equity approximately 69% of the total offshore bonds out of China
being issued by real estate companies.9 Crisis’ in these
Private Debt
77% sub-segments, such as the current real estate crisis in
China, can necessitate the development of alternative
financing channels, in particular Private Credit.

3. U.S. data is represented by Milken Institute: Institutional Investor Base for Non-Investment Grade Loans. Europe data is represented by Pitchbook.
4. International bank loans data is represented by annual issuances from Dealogic. Domestic bank loans data is represented by data from various
central banks, assuming rolling 4-year maturity. Public debt data is represented by ICMA analysis on data provided by Dealogic. Domestic public
debt is represented by Asia Development Bank, assuming 6-year maturity. Public equity data is represented by corporate-only equity issuances from
Bloomberg. Private debt data is represented by annual deal volume from Preqin. Private equity data is represented by annual capital called from
Preqin. The analysis is based on Ares’ assessment as of December 2020.
5. ICMA analysis using Dealogic. Data as of December 2020. International bonds refer to issues that are sold in a market outside the issuer’s
home jurisdiction.
6. Pitchbook and Preqin, Private Equity Deal Volume by Region. Data as of December 2021.
7. Preqin, Private Debt Deal Volume by Region. Data as of December 2021.
8. Projections and forward looking statements are not reliable indicators of future events and no guarantee or assurance is given that such
activities will occur as expected or at all.
9. ICE. Asian Dollar High Yield Corporate Index. Data as of June 2022.

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Fig. 2: Asia Pacific’s Share of Global Allocation to Private Equity and Private Credit (by Deal Value), 2017 to 2021

Private Equity by Deal Value Private Debt by Deal Value

Total: US$7.7bn Total: US$1.1bn

13% 11%
14%

34%

52%
76%

Asia US Europe Asia US Europe

Fig. 3: Asia USD High Yield Bond Market, June 2022

Others
7%
Hongkong
5%
Financials
16%
Indonesia
7% Real Basic
Estate Industry
69% 5%
Others
3%
Macau China
11% 46%
Consumer
Goods
7%

India
24%

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Timing 5
4. Retrenchment in Bank Lending is still bureaucratic and prescriptive in its form and
terms. This translates into long response times and
Whilst bank lending remains competitive on pricing
inadequate flexibility e.g., short duration solutions with
throughout the region, the sector is increasingly less
very restrictive covenants, limited undrawn solutions
able to respond to the evolving funding needs of the
available for acquisitions or capital expenditure
economy for large and mid-size borrowers. The four key
programs, low-hold positions leading to fragmented
reasons for this are as follows:
club deals, low appetite for more levered solutions,
1. In APAC, many banks are government owned and have
and less established intercreditor precedents, which
national policy priorities. As such, they are less supportive
impedes the growth of junior capital.
of certain sectors of the economy and often favor the
larger corporates. The needs of other corporates may We expect the share of financing activity by banks to fall
not be fulfilled. gradually, as bank credit growth is outpaced by other
forms of capital.10 In past crises, we saw similar tendencies
2. The banking sector in APAC has traditionally been used to help
for retrenchment, e.g., many foreign banks exited Asian
absorb economic shocks and banks have accumulated
markets after the Global Financial Crisis (“GFC”) in 2008,
a significant portion of non-performing loans (“NPLs”) on their
as they became subject to tightened regulations. U.S. and
balance sheets. Whilst most of these banks have plans
European banks’ claims in the Asian banking system have
in place to reduce these exposures, the pace of
fallen from 40% of the total amount in 2009 to about 28%
resolution can be deliberately slow in order to maintain
in 2021.11 This retreat has continued in the past two years,
stability. This trend has been exacerbated by the COVID
with ABN AMRO, ING and Westpac retrenching from the
impact, the China Real Estate crisis and the slow-down
region in 2020.12 Finally, we are also seeing retrenchment
of the Chinese economy.
in certain non-bank lenders, such as Non-Bank Financial
3. Banks in APAC are increasingly subject to more rigorous Companies (“NBFCs”) in India and Leasing Companies/
regulation and more elevated capital requirements, which Trust Companies in China.
may reduce their risk appetite. These requirements on
banks introduce inefficiencies in credit markets, which We expect bank and non-bank retrenchment and growth
offer opportunities for other financing channels to in private capital in APAC to follow a similar pattern to what
make attractive credit investments and gain ground in was observed in the U.S. and Europe.10 As banks limit their
the overall market composition. activities and public markets are not able to make up for
the decline, there is an increasing need for private capital
4. Longer term, the increasing penetration of Private Equity
to fill the gap, driving prolonged structural growth for
investment in the region is driving the need for more flexible
Private Equity and Private Credit.
credit solutions. Bank lending in many Asian countries

Fig. 4: Banks Continue to Retrench from Leveraged Loan Market13

100%
75% reduction in participation from 2002 - 2021

80% Leveraged Lending Guidelines

(2013)
Basel III
60% (2014)

40% Dodd Frank

(2010)
20%

0%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

10. Projections and forward looking statements are not reliable indicators of future events and no guarantee or assurance is given that such activities
will occur as expected or at all.
11. Bank of International Settlement, Banking Statistics and Global Liquidity Indicators. Data as of December 2020: https://www.bis.org/statistics/
rppb2104.htm
12. Asian Investor, Credit funds eye openings as more banks cut Asia lending. January 2021: https://www.asianinvestor.net/article/credit-funds-eye-
openings-as-more-banks-cut-asia-lending/465955
13. Standard & Poor, LCD Leveraged Lending Review. Data as of December 2021.

Unwinding the Market’s Clock: Opportunities in Commitment

Timing 6
Fig. 5: Trend Towards Private Capital Will Continue as Investors Expand into Alternatives14

d
Voi
he

De
dt
lle

c
Fi

li n
l
ita

ei
p

n
Ca Growth In Private Debt

Av
te

ai
bi

la

a
lit

iv
y • Private debt experiences

Pr
of increasing demand
Bank and Non-bank Ca
Retrenchment pit from borrowers
al Growth In Private Equity
• Investors begin increasing
• Banks’ share of allocations to private debt
financing activity has Limited Depth of
• Private equity assets under
gradually decreased Debt Capital Market management increased
• Banks and financial by ~50x throughout
• The Asia USD HY market is 2000 to 2020
institutions are continually heavily concentrated. As of
under pressure to clean up June 2022, mainland China • Over the past decade,
balance sheets and India contributed to AUM focused on Asia grew
46% and 24% of the total 2.4x faster than for North
market, respectively America and 3x faster
than for Europe
• Within China, the Real
Estate sector took up 60%
of the market. The market
is prone to pull-backs in
times of crisis

5. Asia Pacific - the World’s Growth Engine Fig. 6: Share of Global GDP, 203017
The challenges in supply of financing for APAC are in stark Asia Pacific's share of global GDP in 2030
contrast to the demand situation. APAC’s rapid economic is estimated to be 52%
growth creates ongoing demand for financing, resulting
in a funding gap. Some forecasts predict that 2%
approximately 80% of global growth will be generated in
APAC such that it will make up 52% of the World’s GDP 5%
in 2030 (Fig. 6). With falling poverty rates and rising 6%
Asia Pacific
spending power, consumers in APAC are expected to
account for half of global consumption growth over the US
next decade.15 Despite continuous cycles of slow-down 16% Europe
and recovery as well as a lingering effect from COVID-19, Africa
52%
APAC is expected to remain the fastest growing region in
Middle East
the world over the next couple of years, projected to post
a 5.0% real GDP growth in 2023.16 While headwinds remain, Others
new opportunities have opened for businesses across the 19%
region, as countries adjust to life through the pandemic
and plan for life beyond.

14. Bain & Company, Asia Pacific Private Equity Report 2022. March 2022: https://www.bain.com/insights/asia-pacific-private-equity-report-2022/.
Forecasts are inherently limited and should not be relied upon as indicators of actual or future outcomes.
15. McKinsey & Company, Beyond Income: Redrawing Asia’s Consumer Map. Data as of September 2021: https://www.mckinsey.com/featured-insights/
asia-pacific/beyond-income-redrawing-asias-consumer-map
16. World Bank, East Asia and Pacific Regional Outlook. Data as of June 2022: https://www.worldbank.org/en/news/press-release/2022/06/07/
stagflation-risk-rises-amid-sharp-slowdown-in-growth-energy-markets
17. GDP is based on IMF estimates and projected forward for 2022 – 2030 using 10-year Compound Annual Growth Rate (CAGR) for the previous decade
(2011 – 2021). Projections and forward looking statements are not reliable indicators of future events and there is no guarantee that such activities will
occur as expected or at all.

Unwinding the Market’s Clock: Opportunities in Commitment

Timing 7
Fig. 7: Estimated Real GDP Growth (%), 2021 – 202318

Strategy* Actual Projections

2021A 2022A 2023E

Asia 6.70% 5.40% 5.20%

China 8.10% 3.00% 5.30%

India 8.90% 6.70% 5.00%

Indonesia 3.70% 5.30% 4.70%

US 5.70% 2.30% 1.50%

Europe 5.40% 3.50% 0.80%

It is widely accepted that such economic growth will need 26% since 2017, with significant growth in direct lending,
to be supported by a competitive banking market, a liquid, mezzanine financing and special situations. Especially
highly diversified and accessible capital market as well in more recent years, several shocks have exacerbated
as an expansion in the provision of alternative private funding needs and liquidity pressures faced by corporates
capital. Against this backdrop, we believe that the current and sponsors in APAC such as shutdown of markets and
financing channels are either becoming less effective or business activities from COVID-19, rising rate environment,
are largely immature, representing a growing opportunity China real estate crisis, and most recently confidence
for more flexible and responsive solutions to be introduced crisis in the global banking sector caused by major U.S.
to the market. and European bank failures. These factors lead to favorable
environment for alternative capital providers in the region
6. Asia Pacific Private Credit is as existing opportunity set in APAC further opened up as
Continuing to Expand a result, which subsequently allows investors to focus
Whilst still being under-represented relative to the size on better risk-reward opportunities, higher credit quality
of the Asian economy, Private Credit as an asset class is companies with enhanced terms and covenants. As
already taking advantage of the structural issues faced the APAC Private Credit market matures with managers
by banks and has undergone a very robust evolution over coming up the curve on how to best capitalize on the
the last five years. Albeit from a relatively small base, opportunity, we believe Private Credit is well positioned
AUM of Private Credit in APAC has increased at a CAGR of to expand further.

Fig. 8: Asia Pacific-Based Private Debt AUM by Fund Type, 2017 – September 202219

72.7 76.1
80
60.3
53.5 Direct Lending
60
AUM (USD bn)

Venture Debt
39.7
40 29.2 Special Situations

Distressed Debt
20
Mezzanine

0 Total
2017 2018 2019 2020 2021 2022
18. IMF. Real GDP growth in 2021 and 2022 is based on actual IMF data. Data as of December 2022: https://www.imf.org/external/datamapper/NGDP_
RPCH@WEO/SAU?year=2021; https://www.oecd.org/newsroom/gdp-growth-fourth-quarter-2022-oecd.htm
Projections for 2023 are based on IMF’s Latest World Economic Projections. Data as of March 2022:
https://www.imf.org/en/Publications/WEO/Issues/2022/07/26/world-economic-outlook-update-july-2022; https://www.oecd.org/economic-
outlook/march-2023/; https://www.oecd-ilibrary.org/sites/f4fab965-en/index.html?itemId=/content/component/f4fab965-en
Projections and forward looking statements are not reliable indicators of future events and there is no guarantee that such activities will occur as
expected or at all.
19. Preqin. Data represented by Private Debt AUM by Fund Type. Data as of September 2022.

Unwinding the Market’s Clock: Opportunities in Commitment

Timing 8
Key Success Factors for Asian Private
Credit Managers
Private Credit investing across Asia presents numerous financing solutions, and manage the assets closely.
challenges for credit managers due to the significant Sourcing attractive opportunities in APAC requires
difference between individual markets in business investment teams to be in constant dialogue with
community, legal frameworks, regulation and taxation stakeholders, including business owners, senior
regimes. Managers therefore need to build significant management, regulators and other investors. This
local expertise and infrastructure in order to originate, close connectivity enables a more detailed
analyze, structure and manage investments effectively. understanding of financing needs, of borrower
These structural hurdles create barriers to entry, behaviors across cycles and of potential risks.
favoring Private Credit managers that have developed
the right approach for this evolving market.
2. The Right Set-Up
To capture the best relative value available once a
1. Importance of Local Origination relationship has been established with a potential
We believe that one of the most important aspects of borrower, the ability to remain flexible and solution-driven
Private Credit investing is the ability to rely on a strong is key. Flexibility to invest across the capital and legal
local origination platform. Successful Private Credit structure of a borrower group, may not only enable an
managers have relied on long tenured local teams to investor to maximize returns, but more importantly may
support their Private Credit strategies, allowing the help secure appropriate downside protection.20 In APAC,
differentiated uncovering of opportunities ahead of the this flexibility necessitates acquiring many regulatory
competition. In addition, we believe that directly originated licenses and creating the required accredited vehicles
transactions can lead to superior risk-adjusted returns, that can hold the specific types of investments across the
building on proprietary direct relationships and the ability region, resulting in a build-up of significant infrastructure.
to shape transactions early on to achieve robust deal
In addition to licensing issues, the diversity and
terms and structures.
complexity of local tax regimes, hurdles around capital
Whilst this consideration to a degree applies globally, we repatriation, and the ability to invest in both the dollar and
The Impact
believe that theof Market Timing
importance of locally Across Asset
originating dealsClasses
is local currencies may impose further requirements on the
Weighted
more AverageinNet
significant IRRas
APAC and
theNet Pooled
region TVPIa by
offers Number of Vintages
contrasting in theinfrastructure
Manager’s Portfolio set-up, in the absence of which
set of business ecosystems underpinned by a diverse set further frictional costs, impacting the ultimate returns
of languages, cultures and types of intermediaries. Access may be incurred.
to reliable information, data and key market intelligence
Throughout the years, Ares’ Asia team has been focused
tends to be less readily available and requires more
on establishing local entities with the appropriate
on-the-ground work.
licenses and tax status in order to enable flexible
We believe that experienced credit professionals investing solutions, maximize recourse to downside
physically present in the local market are required to security and ultimately minimize frictional costs.
source opportunities, assess risks, structure appropriate

Source: Burgiss, All Private Capital as of 9/30/2022; Ares QRG analysis.

20. References to “downside protection” or similar language guarantees are not against loss of investment capital or value.

Unwinding the Market’s Clock: Opportunities in Commitment

Timing 9
To illustrate, below are examples of key structures that are required for certain types of investments in India and China:

India China

• Foreign Portfolio Investment (“FPI”) – FPI enables • Chinese Renminbi Qualified Foreign Limited
access to INR denominated debt/equity and Partner (“RQFLP”) Platforms –Investments in
derivatives (“ODI”) with underlying Indian asset the form of preferred equity or convertible bond
exposure as well as exemption from indirect with some downside protection can be held via a
transfer tax provisions. RQFLP platform.

• Asset Reconstruction Companies (“ARC”) – • China NPL WOFEs – establishment of a NPL WOFE
ARC enables investing directly into onshore rupee in China enables investment buying of NPLs
denominated, defaulted debt. directly from banks, not just the AMCs.

• Alternative Investment Funds (“AIF”) – AIF further

eliminates some limitations of investing through
an FPI regime in India.

3. Achieving Downside Protection There are potential pitfalls, in which seemingly minor
One of the keys to APAC credit investing is knowing how structural differences can be crucial in achieving
to structure deals with strong downside protection.21 effective enforcement outcomes in practice.
In some cases, despite perfected security, enforcement
Key considerations in achieving downside protection in
can involve court processes. Attempts to apply a
APAC include:
developed market approach, such as quickly selling the
• Robust covenants – Most investments in APAC tend to secured assets, may put lenders in a difficult position.
have robust covenants, including leverage maintenance In practice, giving a reasonable period of time for the
covenants and debt service covenants. Due to the more borrower to rectify its default, obtaining pre-approval
muted competition between private credit providers, to sell collateral, or offering a loan restructuring can be
lenders can be quite demanding. Particularly lenders more efficient routes. In our experience of successful
with scale, who are often sole lenders, have the ability to enforcements in most APAC jurisdictions, with the
lead the structuring and terms discussions to achieve right approach, enforcement can be effective in APAC.
strong downside protection. Additionally, managers with deep local experience and
• Operational oversight – In addition to covenants, a good understanding and long tenured relationship
representations and warranties, including additional with relevant stakeholders may often be able to achieve
provisions in the facility agreement lenders are able to a ‘consensual’ restructuring outcome, which can be a
employ some operational oversight. Examples include more efficient way to resolve a restructuring situation.
monitoring/signatory right of bank accounts with • “Offshore/onshore” interplay – It is common to
respect to the use of proceeds or appointing an observer structure deals with funding from the offshore and
to the board of directors at the borrower. security taken over onshore assets, particularly with
• Legal frameworks and enforcement – Despite respect to China and Indonesia. In an enforcement
continuous improvements over time, the bankruptcy scenario, it is imperative for managers to understand
laws and their enforcement in several Asian markets the interplay between onshore and offshore
are often not as efficient as those in developed markets. enforcement processes.

21. References to “downside protection” or similar language guarantees are not against loss of investment capital or value.

Unwinding the Market’s Clock: Opportunities in Commitment

Timing 10
4. Navigating the Political and Regulatory heightened risks, such as online education or technology
Environment firms in China recently.
APAC markets tend to be more exposed to changes in In contrast the policy backdrop in India, the other major
the political and regulatory backdrop, which may affect economy in the region, is marked by remarkable stability
investee companies and investors operating in the and a continued pro-business stance, enabling managers
region. Risks may originate from domestic political to deploy broadly across most sectors.
considerations or geopolitical pressures. While managers
Lastly, we believe APAC investment strategy should be
will not be able to rule out these risks completely, it is
sufficiently flexible to navigate market conditions. In this
critical that they have a detailed understanding of local
way, a manager can create a pool of APAC investments
political and regulatory agendas, as well as the ability to
diversified across a broad set of markets and sectors, to
constantly stay on top of developments through a network
help mitigate exposure to specific regulatory or political
of senior contacts in the business community and with
risks. At the same time, managers are able to emphasize
regulators and policy decision makers. By anticipating
certain countries or sectors to seek to take advantage
policy changes and impacts on the business community,
of the most favorable opportunities on a relative value
experienced and locally connected managers are able to
perspective at any point in time.
minimize risks by avoiding sectors that are subject to

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Timing 11
The Asian Private Credit Landscape –
Defining the Opportunity
We have identified three major types of Private Credit with higher leverage. Direct lenders can accommodate
investing in APAC, namely (i) Sponsor Direct Lending, sponsor timelines and provide flexible one stop financing
(ii) Non-Sponsor Corporate Direct Lending, and solutions. As a result, the percentage of traditional banks’
(iii) Special Situations/Distressed Debt Investing. holding in sponsor-backed leverage finance loans has
dropped significantly in the U.S. and Europe in the past two
1. Sponsor Direct Lending
decades (Fig. 9).
Sponsor direct lending refers to the financing provided
by a Private Credit manager to a Private Equity sponsor Australia and New Zealand – Most Compelling Sponsor
enabling the latter to acquire a majority or controlling Lending Region in APAC
equity interests in a business or to make value-enhancing In our view, Australia and New Zealand are the most
changes to a portfolio company. Historically, the sponsor compelling Sponsor Direct Lending markets in APAC at
financing sector was dominated by the syndicated this point in time. Given the low correlation of economic
loan market led by banks. In recent years, given bank drivers in the region and the advanced maturity of the
retrenchment, direct lending solutions provided by asset class, we believe this strategy in Australia and
alternative investment managers have increased New Zealand represents attractive diversification for LPs
materially as a share of sponsor financing. that are already invested in private debt in the U.S. or in
In addition to banks reducing their balance sheet exposure Europe.24 Since the implementation of the Royal Banking
to the sector, direct lending has become a more attractive Commission in Australia in 2018, the banking market has
option for sponsors, as it can provide key differentiators started to re-assess its balance sheet priorities. With a
over the syndicated loan market. For example, broad traditional lender retrenchment trend now well underway,
loan syndications take time to coordinate due to the the region has experienced a strong increase in Unitranche
multiple parties involved. In contrast, the execution and transactions over the last few years, which confirms
closing timelines with direct lenders can be significantly sponsors’ increasing comfort level with alternative lenders.
condensed. Moreover, with company valuations increasing Local bank lenders also tend to be less familiar with some
in the past few years, Private Equity sponsors have international sponsors, which creates an opportunity for
started to seek higher leverage solutions with the push global Direct Lenders to benefit from existing relationships
towards mezzanine financing or “stretched senior” to with these sponsors. Furthermore, the Australian and
further enhance their capital structure.22,23 It is usually New Zealand insolvency regime is highly attractive for
more capital punitive for banks to pursue such products secured lenders, making those jurisdictions well-suited for
Unitranche financings and direct lending in general.

22. Private Debt Investor, The Debt GPs breaking new ground in Asia. November 2021: https://www.privatedebtinvestor.com/the-debt-gps-breaking-new-
ground-in-asia
23. The use of leverage magnifies the potential for gain or loss on the amount invested and may increase the risk of investment.
24. Diversification does not assure profit or protect against loss.

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Fig. 9. Holdings by Traditional Banks’ in Sponsor-Backed Leverage Finance Loans25

US Europe Australia

70%

1994
10%
2020
65%

2010
35%

2020
70%

2019
?2025
0%

While these supply-side effects continue to develop, year,26 with a yearly average of 18 deals and an average deal
demand for sponsor finance and more flexible leverage size [range] of US$200-240 million (A$300-350 million). In
products is growing sharply. Over the last five years prior to 2021, there was US$19.4 billion (A$28.5 billion)27 in Australia
COVID-affected 2020, sponsor M&A activity has averaged sponsor lending supporting primary M&A activities and
c. US$6.8 billion (A$10 billion) in transaction volume per refinancing needs.

Fig. 10. Increase in Demand – Sponsor Activities in Australia/New Zealand

Unitranchevolumes A$1.3bn A$1.4bn A$3.8bn A$1.6bn A$4.2bn

2022 run-rate
18
No new underwrites
Nil – first AU thru May 2020
Unitranche due to COVID
completed 2017 8
7 6
5 Mar-22 YTD 7
committed deals
7 for A$3.3bn
0 volume

2016 2017 2018 2019 2020 2021 2022

Unitranches provide leverage akin to a senior plus We believe the Unitranche market will continue to capture
mezzanine loan structure, but in a single loan tranche, and additional share from the banking segment and expect
are particularly well-suited to and favored by Private Credit this volume will grow to c.US$17 billion equivalent by the
investors that have the appropriate capital for and ample end of 2025.28
experience with these solutions. Unitranches represented
As the Private Equity landscape in other markets across
the bulk of the higher leverage options with c.US$1.78
APAC matures over time, we expect similar opportunities
billion equivalent written across 8 deals in 2019, increasing
will emerge throughout the APAC region.28
to 30 deals for a value of US$7.1 billion equivalent in 2022.

25. For illustrative purposes only. Sources:

i. U.S. represented by data from FDIC Quarterly, Evolution of U.S. Bank share of Primary leveraged loans since 1994 (2019, Volume 13, Number 4).
ii. Europe represented by S&P Global Intelligence. Data as of June 2020
iii. Australia represented by Ares estimates which is based on 2019 Annual Reports and 2019 APRA filings of the main 4 Australian banks
(ANZ, CBA, NAB, Westpac)
26. Preqin. Completed deals only and including Buyouts, PIPEs, P2Ps, Restructurings and Add-ons. Adjusted for certain non-relevant transactions.
2015 skewed due to A$6.2 billion purchase of financial services business Latitude by KKR, Varde & Deutsche Bank. Number of deals data based on
transactions of known value & greater than A$100 million. Data as of March 2021.
27. Debtwire. ANZ All Private Equity Backed Loans – LBO and Refis. Data as of December 2021.
28. Projections and forward looking statements are not reliable indicators of future events and there is no guarantee that such activities will occur as
expected or at all.

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Timing 13
2. Non-Sponsor Corporate Direct Lending or domestic M&A transactions. These restrictions
Non-Sponsor corporate direct lending is another type provide a continual flow of investment opportunities for
of Private Credit lending, more common in developing alternative capital providers, which will seek to benefit
countries, such as India, China, and Indonesia. It refers from this unfulfilled demand for credit. Additionally, we
to financing provided by a Private Credit manager to expect increasing internationally standardized regulations
companies that do not exhibit financial strain, but need to further curtail the banks’ appetite and ability to lend.29
capital for general operations, business expansion or Corporate lending – Sizing the Opportunity
strategic acquisitions. Corporate Direct Lending AUM in Asia have been growing
Robust economic growth in APAC demands continued robustly at 46.3% per annum (2017 – 2021), reaching US$15.9
access to credit capital for corporates in the region to billion in February 2021.30 Ares believes the structural
expand their businesses. However, as bank lending is inefficiencies in APAC will continue to offer significant
frequently policy, name or scale-driven, credit is often not opportunities for Corporate Direct Lending to take share
available or is in insufficient amounts to companies that from other financing channels. If Corporate Direct Lending
are either (i) at growth stage or (ii) in sectors or situations could substitute only (i) 10% share of the APAC syndicated
that are subject to restrictive policies or practices. loan market and the offshore bond market and (ii) 1% of the
For example, in India and China, banks have varying volumes currently provided by other forms of non-bank
restrictions of lending into the real estate sector lenders, we believe the direct lending market would be well
in excess of $300 billion.31

Fig. 11: Corporate Direct Lending Opportunity Easily Exceeds $300 Billion32

Asia Bank Market Asia Offshore Bond Market Domestic Non-Bank Lending

Asia Bank Market: Asia Bond Market:

Domestic Non-Bank
~$60 Trn ~$10 Trn
Lending:
$7.1 Trn
Asian Corporate
Syndicated Loans:
High Yield:
$2.4 Trn Est. Direct
$147 Bn
Lending
Opportunity:
$71 Bn
Est. Direct Lending Est. Direct Lending
Opportunity: Opportunity:
$240 Bn $15 Bn

Under conservative assumptions, the direct lending opportunity

is estimated to be over $300 billion

Due to the high barriers to entry, Corporate Direct ranging from 9-15%, with strong downside protection33
Lending offers Private Credit managers (with the (in the form of real asset collateral, covenants, and other
right infrastructure) attractive risk adjusted return creditor rights).
opportunities, which may seek unlevered gross returns

29. Projections and forward looking statements are not reliable indicators of future events and no guarantee or assurance is given that such activities
will occur as expected or at all.
30. Preqin. Data as of December 2021.
31. Projections and forward looking statements are not reliable indicators of future events and there is no guarantee that such activities will occur as
expected or at all.
32. Asia Development Bank, Bloomberg, Dealogic, and Ares Estimates. Countries include China, India, Japan, Korea, Australia, New Zealand, Singapore,
Malaysia, Thailand, Indonesia, Philippines, Sri Lanka, Mongolia and Pakistan. Ares Opportunity assumes a 10% portion of Asian syndicated loans and
10% portion of the Asian high yield market and 1% of the non-Bank lending market. Data and assessment as of December 2022.
33. References to “downside protection” or similar language guarantees are not against loss of investment capital or value.

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3. Special Situation/Distressed • Market dislocations –acquiring assets at attractive
Debt Investing valuations compared to their fundamentals during
Special Situations investing is a relatively broad Private volatile market environments. Such dislocations were
Credit strategy, usually targeting situations with low observed during the Global Financial Crisis and are now
entry valuations and/or attractive returns are possible apparent as a result of the pandemic and other recent
due to the circumstances of a borrower or asset owner. dislocations in APAC. Due to the rush for liquidity in
These situations may include a secondary acquisition these environments, there are opportunities to buy
of existing assets or a new primary lending. Investment high quality assets at attractive valuations.
themes include: A good indicator used for the availability of these
• Special situations lending – providing borrowers with opportunities is the level of NPLs in the financial
a financing solution tailored to their specific situational system. High levels of NPLs create pressure on financial
requirements that traditional sources of funding are institutions to sell assets, which may also impinge on
not able to meet. These situations could include lending their ability to provide new lending.
to make a sizeable acquisition or privatizing a listed APAC has historically registered high levels of NPLs in the
subsidiary. It could also include ‘rescue financing’ banking sector likely attributable to less efficient lending
situations, where a borrower requires financing to markets in the region, as well as to more supportive
address a short to medium term liquidity crunch. regulatory and monetary measures to maintain economic
• Stressed or distressed asset acquisition – acquiring stability. In recent years, the level of NPL build-up in the
non-performing loans (“NPLs”) either as a single loan region has been exacerbated due to the severe impact of
or as a portfolio of loans from banks, non-banks or COVID-19. Ares believes that as the various relief measures
other financial asset owners. Investors require the and loan moratoriums that were implemented by
ability to assess the underlying borrowers governments in response to the pandemic come to an
and understand all stakeholders’ objectives in end, the NPL pressures will continue to rise in the
order to affect a resolution of these assets through foreseeable future.
a restructuring or a discounted settlement.

Fig. 12. NPL Opportunity Set in APAC Post COVID-1934,35

Unit US$bn 1,484

1,310 21
1,266 159
1,139 21 19 121
168 162
79 18
111 136
119
China
India
923 967 993 1,183
SEA
Australia

2019A 2020A 2021A 2022E

Fig. 12 shows the NPL opportunity set in China, India, distress. For example, due to the prolonged geopolitical
South-East Asia, and Australia which amounted to tension between China and the U.S., there are many
approximately $1.1 trillion in 2019 and is estimated to Chinese corporates listed in the U.S. that are trading at
have increased by more than 30% to reach approximately much lower multiples than their listed comparables in
US$1.5 trillion in 2022. China. These corporates are assessing options to delist
from the U.S. and redomicile to APAC, offering Private Credit
In addition, other investment opportunities arise out
investors opportunities to provide financing as a means to
of corporate situations that are unrelated to corporate
privatizing overseas listings.

34. Ares Estimates, S&P, China Banking and Insurance Regulatory Commission (CBIRC), Reserve Bank of India (RBI), Otoritas Jasa Keuangan (OJK), Bank
Negara Malaysia, Bangko Sentral ng Pilipinas (BSP), Bank of Thailand, and Reserve Bank of Australia as of December 2022.
35. Estimates are based on Ares and S&P projection. China NPL amount includes gross NPL and special mention loans from CBIRC. India NPL amount
includes gross NPL as reported by RBI. NPL amount for Indonesia includes restructured, special mention loans and gross NPL as of December 2022.

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Relative Value of APAC Private Credit
We believe APAC offers an attractive relative value Another perspective is to compare private corporate
proposition when compared with Private Credit in lending in APAC to the Asia high-yield bond market. Private
the U.S. and Europe. corporate lending has a clear return pick-up: the Bank of
America Asia USD Corporate Credit Index (ACHY)38 total
Sponsor Lending
return index has produced an average annual return of
In Sponsor Lending, some jurisdictions in APAC, notably 5.03% over the last 25 years,39 which means the current
Australia and New Zealand, offer a slight return premium lending asset level returns of 12-13% provide a yield pick-up
over the U.S. and European sponsor lending markets. of more than 5%. At the same time, Non-Sponsor Corporate
On the risk side, as described in 4.1, the Australian legal Lending is almost always secured with first lien security
framework is very friendly towards senior secured creditors over company assets or sizeable blocks of company shares
and is widely considered to provide better protection than (often at ~50% loan-to-value), which grants much stronger
the U.S. and Europe. downside protection than the typically unsecured and
From the perspective of senior secured creditors, the subordinated HY bonds.40
Australian market has exhibited strong leveraged buyout
performance since the GFC. It is important to note that Special Situations
since the GFC, we believe only one senior secured sponsor Special Situations investments tend to be more complex
lending transaction has been restructured. Unitranche and to benchmark across markets, due to the great variety
sponsor lending in Australia are still at an early stage of of investment situations and the mix of primary vs.
development, enabling lenders to provide facilities without secondary investing. Dislocations tend to be deeper and
necessarily having to compromise on typical protections, longer lasting in APAC, making the strategy in APAC less
such as maintenance covenants. prone to brief cycles, while Special Situations investing
in the U.S. and Europe are historically more cycle driven.
Non-Sponsor Corporate Lending In contrast, on-going pressure on the banking systems
Lending to Asian corporates offers a return premium of and recurring dislocations in the financing markets are
2-3% over the Private sponsor-focused Credit markets in less rapidly resolved in APAC. In addition to the structural
the U.S. and Europe. In terms of the return structure, there inefficiencies offering opportunities through the cycle,
are typically 1-1.5% of upfront fees, mid to high single digit Asian financial systems tend to suffer from lower liquidity,
cash coupons, accrual components of another 5-6%, deeper dislocations and the financial systems in the
which may lead to a gross asset level return of 12-13%.36 regions typically requiring more time to digest and clean
While there are some drawbacks related to less up the consequences. Hence, the Special Situations
efficient legal frameworks (as discussed in Section opportunity typically lasts significantly longer and is more
3.3), other factors lead to a less competitive market. The structural to the region, making Asian Special Situations
markets are still much less crowded, and GPs can be very much more of an ‘all-weather’ strategy, compared to
selective in picking attractive risk-reward opportunities. developed market Special Situations. While APAC Special
Experienced lenders can be fairly demanding in terms of Situations strategies are able to generate returns that are
creditor rights and achieve robust downside protection similar to those generated by Private Equity, it is important
through taking collateral over assets (often real estate to remember that the underlying investments are usually
assets) or shares. Other creditor rights could extend to credit investments, with underlying collateral (often at
board director rights, cash management arrangements ~50% loan-to-value) and robust covenant packages.
or other custody arrangements, allowing lenders to
appropriately manage risks.37

36. Based on Ares Asia Deal Team’s observations of the market as of December 31, 2022.
37. References to “downside protection” or similar language guarantees are not against loss of investment capital or value.
38. Asian Dollar High Yield Corporate Index.
39. Bloomberg. Asian Dollar High Yield Index. Data from June 1997 to June 2022.
40. References to “downside protection” or similar language guarantees are not against loss of investment capital or value.

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Fig 13. Asset-Level Return Spectrum of Private Credit Strategies across the Region41

Asia
Special Sits

US/EU
Private Credit Strategies

Spacial Sits

Asia Corporate
Lending

AU/NZ Sponsor
Lending

US/EU Sponsor
Lending

0 5% 10% 15% 20%

Asset Level Returns (%)

41. For illustrative purposes only. Based on Ares Asia Deal Team’s observations of the market as of December 31, 2022.

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Conclusion
While the market is less mature than the U.S. and capital and scale, able to provide a one-stop
Europe, we believe the Asian Private Credit market inancing solution, can often extract attractive
represents a very material opportunity for growth in economics including cash and accrual interest,
an attractive asset class: fees, non-call premiums and potential equity upside.
At the same time, lenders can benefit from very tight
• The asset class has already entered into a phase of
protections, including robust covenant packages,
rapid growth. Private Credit dry powder for Asia
tight documentation and asset collateral (often
reached $27.6 billion in 2022 and grew at a CAGR of
~50% loan-to-value).
14% since 2017.42
• As Private Equity penetration increases in APAC, many
• We believe sustained, fast growth is highly likely due
sponsors do not have strong financing relationships
to the underlying economic growth of Asia-Pacific
in the region and are prepared to grant more attractive
economies and the current heavy dependence on
pricing and terms (at comparable leverage multiples) to
traditional banks (>75%), which offers Private Credit
trusted lenders, that are able to provide the appropriate
ample scope to gain market share from the banks.
financing solution.
• Given the comparative lack of intermediaries in
• While legal frameworks and enforcement processes
market, based on established relationships in market,
in the region are not as efficient as in many developed
we believe managers can more often benefit from
markets, our experience shows that managers with
proprietary, non-competed deals vs. other regions.
the right experience are able to achieve favorable
• Due to the more complex market structure in APAC, enforcement outcomes and recoveries across APAC
encompassing several very different jurisdictions, jurisdictions through a combination of tight initial
business communities and legal frameworks, the deal structuring, resourceful restructuring and
APAC Private Credit market has higher barriers to entry. enforcement approaches, and an experienced portfolio
These limit the intensity of competition in APAC, leaving management team.
experienced managers who are able to navigate and
• Finally, the Private Credit asset class offers significant
take advantage of these barriers to seek attractive risk
portfolio diversification benefit to LPs,43 many of which
adjusted return opportunities, comparing favorably to
already have significant developed market Private
those in developed markets.
Credit exposure, given the differentiated economic
• Given the continued demand for capital, coupled with drivers and business cycles in APAC.
selective bank retrenchment, a manager with flexible

42. Preqin. Data as of December 2022.

43. Diversification does not assure profit or protect against loss.

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Legal Notice and Disclaimers
• The views expressed in this document are those of • This document may contain "forward-looking"
Eric Vimont, Tobias Damek, Janet Lee, as of September statements. These are based upon a number
2023, and do not necessarily reflect the views of Ares of assumptions concerning future conditions
Management Corporation ("Ares Corp," together with that ultimately may prove to be inaccurate. Such
Ares Management LLC or any of its affiliated entities forward-looking statements are subject to risks and
"Ares"). These views are provided for informational uncertainties and may be affected by various factors
purposes only, are not meant as investment advice, and that may cause actual results to differ materially from
are subject to change. Moreover, while this document those in the forward-looking statements. Any forward-
expresses views as to certain investment opportunities looking statements speak only as of the date they
and asset classes, Ares may undertake investment are made, and Ares assumes no duty to and does not
activities on behalf of one or more investment undertake to update forward-looking statements or
mandates inconsistent with such views subject to the any other information contained herein. The success
requirements and objectives of the particular mandate. or achievement of various results and objectives is
• The data, investments, and asset classes mentioned dependent upon a multitude of factors, many of which
in this document may not be suitable for all investors. are beyond the control of Ares.
This document does not provide tailored investment • The document may not be copied, reproduced,
advice and is primarily for intended distribution to republished, posted, transmitted, distributed,
institutional investors and market professionals. Such disseminated, disclosed, quoted, or referenced, in
investments can be highly illiquid, are speculative, whole or in part, to any other person without Ares’
and may not be suitable for all investors. Investing in prior written consent.
such investments is only intended for experienced and • Certain information contained herein concerning
sophisticated investors who are willing to bear the high economic trends is based on or derived from
economic risks associated with such an investment. information provided by independent third-party
Investors should carefully review and consider potential sources. Ares believes that such information is accurate
risks as well as their specific investment objectives and and that the sources from which it has been obtained
experience, time horizon, risk tolerance, and financial are reliable; however, it cannot guarantee the accuracy
situation before making any investment decisions. of such information and has not independently verified
• Nothing contained in these materials constitutes the accuracy or completeness of such information or
investment, legal, tax, or other advice, nor is it to be the assumptions on which such information is based.
relied on in making an investment or other decision. Moreover, independent third-party sources cited in
Ares makes no representation or warranty (express or these materials are not making any representations
implied) with respect to the information contained or warranties regarding any information attributed to
herein (including, without limitation, information them and shall have no liability in connection with the
obtained from third parties) and expressly disclaims use of such information in these materials.
any and all liability based on or relating to the • These materials are not an offer to sell, or the
information contained in, or errors or omissions solicitation of an offer to purchase, any security or
from, these materials; or based on or relating to the management services, the offer and/or sale of which
recipient’s use (or the use by any of its affiliates or can only be made by definitive offering documentation,
representatives) of these materials. Ares undertakes no which will contain material information with respect to
duty or obligation to update or revise the information any such security, including risk factors relating to any
contained in these materials. such investment.

REF: SSG-00447

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