Q&A: Bain Capital Credit's Barnaby Lyons

Q: What do you see as the most attractive investment opportunities in Asia’s private credit space?

A: The most compelling thematic opportunities in Asia are non-performing loans (NPLs) in China and distressed assets in India. But these are just one part of a much wider private credit opportunity across the region. We have a very active business providing primary capital solutions to a range of borrowers who cannot access traditional financing, and are active in this space across each of the major economies.

Q: What has changed to make Chinese NPLs more attractive?

A: China has been looked at many times in the past, but we didn’t see that opportunity set as investible for reasons including the development and sophistication of infrastructure and the court system. A lot of those factors have fundamentally shifted today. It’s province and city specific, but in certain markets there is a professionalized judiciary measured by clear KPIs [key performance indicators] around law enforcement; there's clear and standardized documentation, and the ability to track underlying collateral, security, lien enforcement; and that will help to underwrite assets. We’re also seeing an increased flow of opportunities given the rising underlying pools of NPLs at the banks. So we view the Chinese NPL market as an executable, interesting and scalable opportunity.

Q: And what has changed with regard to India’s distressed assets?

A: The Reserve Bank of India (RBI) and the Modi government recognize this as a pretty significant threat to the underlying growth of the Indian economy, and there's been a host of actions over the last 12-18 months to attract foreign capital and streamline processes to resolve that distress. There’s a new bankruptcy regime that sets clear timelines – it’s yet to be fully tested, but nonetheless on paper it's a massive change. There are also improved tax rules to provide clarity to foreign investors, and the closure of a variety of loopholes which historically allowed non-cash transactions with banks.

Q: What factors affect your approach to this market, and how do you address them?

A: Investing in India is not without its challenges, especially in distressed situations where local market dynamics and local stakeholder management is critical. We've set up a compelling joint venture in India with Piramal Enterprises, a well-regarded and successful local conglomerate, to do distressed investing for control deals. There are large businesses and good assets which are distressed, and our capital and operational expertise can reinvigorate them.

Q: What prompted you to take this approach, and how does it compare to your investment strategy in other markets?

A: It’s rare that Bain Capital pursues this kind of partnership. We’ve chosen to JV in this segment because distressed situations require significant stakeholder management and operational hands-on work, and we felt that having a local partner of Piramal’s caliber would add benefits in addition to our own platform in Mumbai. Piramal benefits from Bain Capital's expertise in structuring, diligence, and operational turnaround, while bringing its long hisotry in India and connections to government, promoters, and local banks, with a different perspective than a US institution would have access to.

Q: To what extent do you see other GPs and LPs responding to the opportunity in Asian private credit?

A: There’s been limitedfocus on Asia from a credit perspective among GPs, although interest has been increasing. There are a few regional investors to be aware of, and a few global investors, ourselves included, are building platforms, but the level of competition is not comparable to what we see in Europe and North America. It’s difficult and expensive from the human capital standpoint to invest in teams around the region, and as a result LPs haven’t had that many options. I do think people are waking up to the opportunity and LPs are appreciating the dynamic. Many of them have allocated heavily to direct lending and special situations strategies in the West, and returns are getting tighter in that space. There are still pockets of opportunity, but in the US in particular it’s very quiet. We see that in our own funds – relatively less of our global special situations fund is being allocated to North America; Europe and Asia have been the growth drivers.

Q: How do you see the market changing in the future?

A: Looking back over the last 15 years of special situations investing in Asia, there have been successes, but there have also been failures. Where there have been failures they have been around managers who were too siloed in particular segments and subject to the volatility of certain economies and sectors, or who pivoted to things they weren't qualified to do, with a completely different risk profile. So LPs who were at the forefront of exploring the region have both positive and negative experiences, but now we are really starting to see interest. People appreciate the point we're at – they see this as the beginning of an NPL cycle rather than midway through it, which is where we are in Europe, or beyond the end of it, which is where we are in North America.

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• Topics
• Greater China
• South Asia
• Credit/Special Situations
• GPs
• China
• India
• Bain Capital Asia
• Structured finance