Asia private credit funding hits eight-year low on China slump

ASIA’S private credit market faces diverse challenges in 2025 after fundraising dropped to an eight-year low and concerns over China’s ailing growth hit sentiment.

Fundraising of Asia Pacific-focused private debt funds fell 34 per cent to US$5.4 billion in 2024 from the year-earlier period, the lowest tally since 2016, according to Preqin data. Capital deployment in the region dipped 67 per cent to US$4.6 billion last year, the data show.

Although China still accounts for a sizeable share of Asia’s total – taking about a fifth, or US$1 billion, of regional capital deployed in 2024 – it is no longer a huge driver of transactions and returns. The country’s real estate crisis, coupled with a crackdown on the financial services sector sparked an investor exodus.

Asia’s private credit market is also much less mature and more nuanced with each country presenting a different risk profile. All this has made the region a much harder sell to investors.

“The decline in fundraising for dedicated Asia-Pacific direct lending funds could reflect broader challenges in navigating Asia’s diverse markets,” said Punit Patel, a partner at Davidson Kempner Capital Management. “Concerns around China and jurisdictional risks likely explain much of the slowdown.”

Moreover, investors in Asia are not sufficiently compensated for the risk of lending given that premiums have compressed in both the public and private credit space, experts said.

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Still, market participants remain relatively optimistic about 2025 given that Asia-Pacific represents just a fraction of the US$1.6 trillion global private credit market. Asia’s merger and acquisition (M&A) activity is likely to create more direct lending opportunities, said Davidson Kempner’s Patel, adding that the commodities and healthcare sectors remain bright spots.

Many private debt players are particularly bullish on markets outside China. Here are the countries expected to see growth in 2025:

Australia

As Australia’s leveraged buyout activity continues to build momentum, fund managers expect rising deal flow to provide new business opportunities in 2025.

The growth in 2025 will likely “reflect a mix of increased M&A and property construction and development, as well as in areas where there is a particular capital need or market dislocation”, said Sebastian Paphitis, managing director specialising in corporate finance at advisory firm Alvarez & Marsal.

The asset class will continue to be an important funding source in Australia’s coal sector as some banks shun commodity-related companies due to ESG concerns. Chow Tai Fook Enterprises-owned Loy Yang B, a coal-fired power station in Victoria, Australia, is exploring private credit and bank debt to refinance maturing debt.

India

India’s private credit market is off to a busy start of the year with two firms planning new funds that combined would top US$1 billion, as they seek to tap demand from investors for high-yielding debt. As a result, the South Asian nation remains a bright spot for the asset class given its reliance on external capital.

That said, how much growth the country sees will largely depend on its domestic economy. India’s economic growth and manufacturing investment activity need to pick up for the asset class to achieve 20 to 25 per cent growth over 2024, said Bharat Gupta, a partner that covers private credit at Ernst & Young.

Japan

Japan’s rising rates and a slew of M&A activity will spur more private debt demand. Some high-profile deals that have emerged include the potential nine trillion yen (S$79 billion) management buyout of Seven & I Holdings, and an ongoing tussle between KKR and Bain Capital to take over Fuji Soft in a US$4 billion-plus transaction.

Diane Raposio, partner and head of Asia credit & markets at KKR, expects junior debt financing to take off as a result. Moreover, a lot of the corporates, including listed companies, “are looking for ways to move assets off balance sheets so they can become more efficient”, said Raposio, adding that all these make Japan “an interesting place” for private lenders.

South Korea

South Korea’s build-up of troubled property loans has created a number of financing opportunities for private credit firms – a trend that is likely to continue in 2025, said KKR’s Raposio.

The country could also benefit from investors’ desire to diversify into other developed markets within Asia, said Andrew Bishop, a partner and chair of Latham & Watkins’ finance department in Asia.  

South-east Asia

Meanwhile, private credit players are bullish on South-east Asia as a region, despite the many nuances. There is a growing demand for investments in logistics and infrastructure, in addition to an increase in restructuring and workout inquiries – all of which present opportunities for private debt funds.

“South-east Asia offers a diverse range of opportunities, notably in digital infrastructure in Malaysia and Singapore,” said Celia Yan, head of Asia-Pacific private credit at BlackRock, adding that new companies in Indonesia and the Philippines serving the middle class are also underbanked. BLOOMBERG

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