Private credit: Untapped market

Sammasan Capital plows a relatively lonely furrow as an independent pan-Asian credit investor servicing the region’s underfunded small and medium-sized enterprises (SMEs). A handful of global firms have established a presence here, often targeting larger-scale opportunities. Sammasan – established by two former GE Capital executives and seeking to raise $300 million for a debut fund – mostly finds itself competing for deals against growth equity providers.

Yet the potential for private credit lending in Asia is unmistakable, driven by banks that have either never been willing to deal with SMEs due to credit risk concerns or are less willing than before because regulatory reforms are starting to bite. Direct lenders are said to account for 50% and 90% of the leveraged finance markets in Europe and the US, respectively. Asia is at nothing like these levels, but early signs of a shift have been detected.

In a recent survey of mid-market companies and private credit providers with operations in Asia Pacific by Debtwire and Acuris Studios – both sister entities of AVCJ – more than two-thirds of respondents said financing from sources beyond the traditional channels has become critical to their business. A clear majority have used non-bank financing in the past year and plan to use it in the future.

More than half would be willing to pay higher interest rates to these providers in the expectation that structured finance solutions would be more flexible and reach them faster. Typical Sammasan targets not only include borrowers that have never qualified for bank support or seen that channel run dry; they might also have exhausted available banking facilities. A lender that can tailor financing packages to meet specific needs – whether the solution involves from asset-backed loans and receivables financing to unitranche and mezzanine loans – may have unique value.

Meanwhile, the debt versus equity question remains fascinating and finely balanced. A growth equity investor would claim that they have barely penetrated the SME space, where millions of entrepreneurs are coming to the realization that they need partners with operational expertise as well as capital. The credit argument is largely based on an assertion that these people are inherently suspicious of giving up equity to third parties and are growing fast enough that paying a premium for debt is no great sacrifice. Survey respondents came down 55-45 in favor of debt for future funding.

The challenges to building scale in Asia, even as an SME lender with a pan-regional remit, are not unlike those faced in Europe. While the US is homogenous in terms of language and bankruptcy legislation – though multiple offices are essential for local deal sourcing – diversity is the dominant force in Europe. Without teams in each market, who can leverage local relationships and navigate very different on-the-ground realities in terms of regulation and enforcement regimes, it is difficult to operate.

Industry participants claim there remains a clear division within Europe between half dozen private credit providers that have scale and the two dozen that focus on certain sectors or geographies. Several groups expanded into Europe from North America and failed to establish a truly regional footprint because they tried to run everything out of London. Ares Management, now present in seven cities across Europe, was among those that succeeded – but the size of the initial investment put into the ground meant the regional operation didn’t turn profitable for several years.

Perhaps this provides helpful context for the recently announced acquisition of Asia-based SSG Capital by Ares. If the firm wanted a readymade platform for the region of reasonable size, SSG is one of the few groups that could provide it.

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• Topics
• Credit
• Financials
• Credit/Special Situations
• Asia
• Europe
• SME
• NBFCs