It was a pleasure to host CAIA Member and KKR Managing Director Haining Yin at our event in Hong Kong. Haining spoke of the transition of the China economy and private capital opportunities across the region. See KKR’s latest reflections on APAC private capital.
Authored by John L. Bowman, CFA
I’ve been traveling to Asia regularly for a quarter century. From that very first trip in early 1998, less than a year after the handover of Hong Kong, the region has always arrested my wonder with its vitality, winding history, colorful cultures, and explosive flavors. Over those countless trips, I’ve sown deep friendships, cultivated a more informed understanding and empathy for the world’s economic and geopolitical blocs, and even adopted our youngest two children. It’s a special place that changes you.
It's also the economic engine of our global future. The largest continent, by both land mass and population, contributes 40% of the world’s GDP today, but nearly 70% of GDP growth. As Asia goes, the world will go. But that disproportional optimism in commerce and finance is wrapped in heterogeneity with more than 40 mostly developing countries, thousands of languages, and geographic dislocation that makes it challenging to navigate physically and professionally. Just as in investments, its fragmentation and inefficiency create outsized return opportunities for the intellectually curious.
At the writing of this piece, I’m returning from two weeks spent in the region and wanted to provide a brief overview — like postcards from the edge, or perhaps paper boats, of my insights from various panels, conversations, and conferences.
1. Navigating the waters: Private credit is just in its infancy and not as frothy as the West.
We all know the story of the effects that the Dodd-Frank and Basel capitalization requirements had on bank lending in the West. The main source of small and medium sized enterprise capital formation was mothballed, and the private credit Kraken was released. What was largely an appendage of the capital stack in a sponsored private equity deal pre-GFC has exploded into a $1.5T asset class over the last decade. And despite the economic vigor, only $100B of that private debt originates in Asia. Part of that evolution is natural as the banks in APAC are still providing >70% of debt financing while that’s dropped to only 30% in the developed West. As such, most of this Asian paper is currently distressed, NPL, or mezzanine financing. But as the asset class matures and new GPs pounce on the opportunity to underwrite and participate in the buoyant future, a transition to more highly secured direct lending and asset backed industry awaits.
Asian Private Credit Panel in partnership with the Singapore Venture and Private Capital Association
2. Don’t throw the dragon out with the bathwater.
Western punditry tends to take a binary view of China. The narrative typically goes that given the geopolitical saber-rattling, complete industrial decoupling must follow, and China becomes “uninvestable.” Further, with the public real estate indebtedness and unfavorable demographics, has the China story lost its luster? The dampening economic picture is real and certainly national security interests are creating off-limit silos in both China and the United States in areas such as military equipment, semiconductors, artificial intelligence, and data protection. Both governments have taken explicit actions to protect their intellectual property. But while those industries certainly benefited from a red-hot venture capital eco-system in recent years, a transformation in entrepreneur and economic emphasis seems to be accelerating. Energy transition and industrial engineering/digitization are growing rapidly, and many economists expect opportunities in solar panels, electric cars, mobile phones, wind power, robotics, and shipping to more than offset the real estate woes and slowdown in e-commerce and social media growth of the past decade.
Navigating the future of Asian private capital and hedge funds panel with Haining Yin, CAIA of KKR, and William Ma, CAIA of Grow Investment Group
3. ASEAN buzz is palpable.
All that said, APAC is much more than just China. There was more optimism, perhaps since the mid-90’s (gulp), particularly for ASEAN. Singapore and Vietnam were massive beneficiaries of the COVID period; Singapore as ex-pats and portions of the investment industry flocked to the city state creating a huge tailwind for real estate and the service economy and Vietnam, as corporations looking to diversify their supply chain away from China. But the most vigorous discussions during my last few trips to the region have been about Indonesia. With a population nearly the size of the United States and a GDP more than three times its second-largest ASEAN neighbors (Thailand and Singapore), the behemoth has a recipe for fiery growth. With the world’s third largest democracy headed to the presidential polls in February, investors are salivating at the hope that expectations of 5% GDP growth and the transition from an export to a consumption dependent economy is set for sustainable advancement. Private capital opportunities look to be very attractive in these economies as the listed equity markets are largely in traditional industries such as banks and conglomerates. Infrastructure credit and new economy private equity investment look to have a bright future.
Opening panel at Alts Singapore on the future Asia with Jayne Bok of WTW, Neeraj Seth of Blackrock, and Asish Goyal of OMERS
The insights presented here merely skim the surface. I encourage you to delve deeper into this multi-faceted topic within these curated articles, each providing a richer perspective on the region’s economic dynamics and the opportunities that lie within.