Given the strength of Asia’s financial markets, why is there a need for alternative funding sources in Asia?
Alternative funding has traditionally been supplied in Asia by US and European banks and hedge funds, together with various private lending sources.
Following the Asian financial crisis — and in the wake of the more recent global financial crisis — a lot of funding sources disappeared as banks and hedge funds stepped away. Within Asia, regulation of domestic banks often means that local lenders may not always be in a position to provide lending facilities. This has left a void where there is a need for alternative funding to fuel business expansion amid rising economic growth.
So which sectors are most in need of funding?
It is spread across a range of sectors and can include infrastructure, natural resources, power generation, basic industries and high tech. Unless it’s a government-run company, or significant conglomerate, there are continuing capital funding needs in Asia, especially in the short term, which continues to support our role. The reality is that within Asia, every market does have specific needs for funding which are not being addressed by traditional lenders. It’s also fair to say that we continue to see enormous opportunities in Japan and Southeast Asia with lower first-tier borrowers, second-tier borrowers and the middle market. All these companies have good credit-worthiness and established businesses. They are considering alternative funding sources as a viable option to help ensure continued business growth.
Does this include distressed investing and special situations?
Interestingly, the role of special situations has changed in Asia. Following the global financial crisis, the role of special situations has now become fairly entrenched as an accepted funding source, which is a lot different from a decade earlier in Asia. That said, every fund is very different in their approach and offering.
How concerned are you about the outlook for China and the potential of worsening of credit there?
I have been doing business in China since 1991, and our experience is that the credit cycle is very regional. It can be specific to provinces and even cities, so it’s hard to generalise across the country.
Additionally, the Chinese government has been flexible and timely at attempting solutions. When they see weakness in the credit cycle, they have responded with rapid and usually effective measures. For investors and lenders who do not have local China experience, there are risks as the economic differences between cities can be large yet subtle.
Investors who look at China as a country with a single credit cycle really miss the point that China is in fact a nation with multiple cycles moving at very different speeds. That’s why offshore debt instruments, favoured by many investors, are not a true reflection of fundamentals.
What about Southeast Asia?
For Southeast Asia there are a couple of points, which have helped change dynamics in recent years. The first is that demand for resources from China, India Japan and the US has created a strong, virtuous cycle. The second is that economic management has dramatically improved, which insulate countries, like Indonesia, from the global economic crisis. There are also continuing opportunities for lenders, which have local knowledge and expertise, to be part of the continuing growth story of the region.
What’s the key to success in navigating Asian markets in the area of special situations?
To succeed in Asia with special situations and distressed debt requires a combination of local knowledge, strong historical data, deep personal relationships and an appreciation for country-specific laws, regulations and accounting standards. Added to that, there needs to be a variety of exits paths and enough liquidity to withstand unexpected market moves. Investors who succeed with special situations tend to be very granular and technical in their approach yet personable as long-term relationships continue to count.
This interview first appeared in the August 2011 issue of FinanceAsia magazine