An analysis of plans to invest capital in alternatives over the next 12 months revealed private debt as a favorite among investors globally, with around half of investors noting that they intend to increase their allocation to the asset class, according to new data from Preqin.

In its recent Alternatives in APAC webinar, the firm cited this trend as a theme against the backdrop of higher interest rates and lower credit availability, although equity continues to favor the US and European markets over APAC.

However, despite its relatively small size by global standards – equivalent to just 7 percent of the global private debt market – private debt in the Asia-Pacific region is growing in popularity with assets under management doubling in five years, Preqin’s head of APAC and valuations, Angela Lai, said.

Lai explained that in the Asia-Pacific region, traditional banks still dominate lending, with investors turning to private debt as part of their "distressed strategies". By contrast, in North America and Europe, "private debt can often compete directly with banks as a primary lender."

However, due to the higher proportion of high-risk strategies, Lai noted that Preqin's performance forecast for private debt is higher in APAC than in other regions.

Also, speaking on the webinar, Peter Graff, partner and head of direct loan sponsorship in Asia at Ares Management, said that while Asia lags behind its global peers, the opportunities presented in APAC are "tremendous". Distress, mezzanine and venture debt strategies are popular, but direct lending is also starting to grow.

Graff believes that with $500 billion in dry powder and over 500 firms investing, private debt firms are focused on growth capital or growth capital, serving businesses that need debt to grow while their EBITDA grows .

"Asia has seen tremendous growth in many different countries over the last five to 10 years, where all of a sudden you need debt because all these businesses no longer have $10 million, $20 million EBIDTA, now they have $50 million, $100 million, $200 million EBIDTA."

Looking at the kind of returns investors can expect to see from the region, Graf stressed that while APAC currently has a risk premium relative to the rest of the world, this may not be the case forever.

“Until maybe six months ago, the yield you were getting in Asia versus the US and Europe was fairly similar. But we've also seen over the last couple of quarters, in particular, that yields have come down quite a bit in the US market, whereas they've probably been more resilient for Asia as a whole,” Graf said.

"It's important to keep in mind that as you compare some of these larger jurisdictions against each other, just comparing the numbers isn't really fair. What does the documentation look like, what businesses do you actually support? And probably the biggest advantage that Asia has is, all else being equal, the growth for specific or individual companies, their industries and the countries in which they operate, perhaps the outlook is stronger for them than for other jurisdictions globally. scale.

Adding that "the comparison is not always apples to apples", Graf said the outlook for Asia was "very positive in the long term".

Citi said last month there was a "clear structural story" unfolding in Australia's capital markets as regulatory pressures and declining risk appetite prompted banks to withdraw from the commercial lending market. That, in turn, has opened up an "attractive niche" for private lending, which totaled about $188 billion in Australia last year, according to EY's latest estimates.