PR I VATE C R E D IT

Private Credit in Asia Pacific:

A Region on the Rise

For Professional Investors Only

 KKR PRIVATE CREDIT | Private Credit in Asia: A Region on the Rise

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

Executive Summary
Private credit is a nascent asset There are four key reasons we think the asset class
deserves more attention in the coming years:
class in the Asia Pacific (APAC)
• The lion’s share of future global economic growth is
region, with tremendous expected to happen in APAC. Though public markets
are evolving, we believe private credit is better suited
growth potential and opportunity at the moment to capture the dynamism of the
for investors. region’s businesses.

• An allocation to private credit in APAC can diversify

exposure to private credit in North America and
Europe. The variety of economies, ranging from
Written by: Brian Dillard fast-growing emerging markets to huge developed
Partner
economies, adds to the diversification potential.
Head of Asia Credit

Diane Raposio • Multiple demand drivers beyond GDP growth

Partner can help sustain the growth of private credit in APAC,
Head of Asia Credit & Markets
in our view, including the maturation of the private
SJ Lim equity market and a dearth of flexible, accessible
Managing Director
Head of Southeast Asia and India Credit capital.

• We believe lenders with deep, flexible pools of capital

and the ability to partner with a range of borrowers
in the region will tend to have better negotiating
power on protections and terms relative to the United
States and Europe, where private credit markets are
generally more crowded.

In this paper, we will discuss the supply and demand

factors shaping the growth of private credit in APAC,
how different types of private credit strategies can help
fill in financing gaps for sponsors and companies, how
we think about relative value in the market, and the
importance of deep local relationships in a complex and
diverse region.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

Table of Contents

Introduction 4
1. The Demand Side: What Is Driving Private Credit in Asia Pacific? 5
2. The Supply Side: The Credit Landscape in Asia Pacific 10
3. How Performing Private Credit Can Address Asia’s Capital Gaps 12
a. Direct Lending 12
b. Capital Solutions 14
c. Collateral-backed lending 14
4. Understanding Relative Value 15
5. Asia Pacific Private Credit as a Diversifier 16
6. Conclusion 20

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

Introduction
The Asia Pacific (APAC) region is home to Yet, even amid all that growth, companies in the region
face a common challenge: a funding environment that
a rich tapestry of market environments, does not always provide access to the flexible capital they
including two of the world’s three largest need to expand, refinance, innovate, and evolve. The credit
market in APAC is dominated by traditional and relatively
economies (China and Japan), technological
conservative bank capital, while the region’s public equity
powerhouses, financial hubs, and fast- and debt capital markets are on the whole less developed
growing emerging markets that are compared to those in the West.

poised to reap demographic dividends. We think private credit is distinctly suited to fill the void.
Though the market is still small compared to the private
The region’s dynamic economies already credit markets of the United States and Europe, it has been
account for the bulk of global growth and growing steadily, and we think there are multiple drivers
that can help sustain that growth.
are poised to grow in magnitude.1

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

The Demand Side: Additionally, there are compelling opportunities

for private credit to support leading private equity
What Is Driving Private Credit sponsors, offering an attractive alternative to

in Asia Pacific? traditional bank funding. At more than half the size
of the U.S. market and almost double the size of the
Through our work as a credit investor, we are seeing European market, the APAC private equity market has
a growing number of maturing businesses in APAC approximately $2.9 trillion in assets under management
that could benefit from diversified capital to meet that can generate demand for private credit solutions
a range of funding needs. Some are growing into in the region (Exhibit 1). Deal value has tripled from $63
global players, while some family-owned companies billion in 2012 to $198 billion in 2022. The region’s buyout
are trying to figure out how to transition to a more market is maturing, with a greater focus on traditional
institutional model. Entrepreneur-led companies want leveraged buyouts, a key driver of demand for private
to finance growth without diluting their ownership credit financing. At the same time, the APAC private
interests prematurely. Public companies are privatizing debt market remains significantly undercapitalized both
to unlock value, and large conglomerates in Japan relative to the markets in the United States and Europe
and Korea are spinning off unprofitable or non-core and to private equity capital dedicated to the region.
assets. Payment-in-kind (PIK)/HoldCo structures, cross- The ratio of the private equity to private debt assets
border funding capabilities, stretching leverage, bullet under management is 30.8x for APAC compared to 5.2x
repayments, and hybrid solutions with features of debt and 3.5x for the United States and Europe, respectively
and equity can be very advantageous to businesses (Exhibit 2).
in these situations. Unfortunately, this type of credit is
rarely available from traditional lenders in APAC, as we’ll
discuss in the next section.

EXHIBIT I | Regional Private Equity Assets Under Management Over Time

$6,000

$5,000

$4,000
($bn)

$3,000

$2,000

$1,000

$0
December 2018 December 2019 December 2020 December 2021 December 2022 March 2023

Asia-Pacific Europe North America

Source: Preqin as of March 31, 2023. Asia Pacific includes Asia and Australasia.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

more common for American and European private

EXHIBIT 2 | Regional Private Equity to Private equity sponsors to select private credit, as it can be a
Debt Assets Under Management more efficient, bespoke form of capital for financing
transactions, with the ability to offer terms tailored to
$6K 35x
the strategic objectives of the transaction (e.g., flexible
$5K 30x leverage levels or long-dated maturities), execution
25x speed, and certainty. 2 Private debt, including unitranche
$4K
structures and first-lien/second-lien debt packages, 3 is
20x
funding more buyout transactions in APAC. We expect
(bn)

$3K
15x
private debt to gain market share in financing private
$2K
10x equity-related transactions in APAC over the next decade
$1K 5x as market penetration trends toward the levels in more
developed credit markets.
$0 0
Asia-Pacific Europe North America Finally, it is impossible to talk about the increasingly
Private Equity AUM Private Debt AUM PE/PD AUM
sophisticated financing needs of APAC businesses, or
(LHS) (LHS) (RHS) about the development of private equity in the region,
without talking about the economic growth that underpins
Source: Preqin as of March 31, 2023. Asia Pacific includes Asia and Australasia.
it all. APAC economies account for nearly two-thirds of
total global real GDP growth and are expected to drive
We believe the current state of private credit in APAC about 50% of total global capital expenditure investments
is comparable to that of Europe at earlier stages of in the short-term (Exhibit 3). Over the next five years, we
market development, when banks provided most of expect the region’s GDP growth to outstrip that of Europe
the capital for private equity buyouts. Today, it is much and the United States by more than 2% (Exhibit 4).

EXHIBIT 3 | Contribution to Global Capital Expenditure Investment by Region

40

35

30

25

20

15

10

0
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24 26

US EU APAC Other

Source: Debtwire as of September 30, 2021

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

EXHIBIT 4 | Contribution to Global Growth by Region

7%
6%
5%
Asia
4%
3%
2% U.S.
1% Euro Area
0-1%
-2%
-3%
-4%
-5%
-6%
-7%
16 17 18 19 20 21 22 23 24 25 26 27

Data retrieved as of November 8, 2023. KKR Global Macro & Asset Allocation (GMAA) estimates for United States, Euro area, and China. IMF estimates for other
APAC countries, nominal GDP-weighted. Sources: Haver, IMG, KKR GMAA analysis

However, it is not just how much APAC is growing relative of the world’s 4-billion-strong consumer class 5 and
to the rest of the world, it is also how. We expect the India and China alone are projected to add 64 million
region to lead the world in global consumption growth more people to that consumer class this year.6 Meeting
as the middle class expands (Exhibits 5 and 6). The the needs of these new consumers will require new
region’s households accounted for nearly 42% of the businesses, the expansion of existing businesses, and
world’s wealth, or $218 trillion, in 2020.4 According to the ultimately, more capital.
Brookings Institution, the region makes up 50 percent

EXHIBIT 5 | Private Consumption by Region

$28

$24

$20

$16
(tn)

$12

$8

$4

$0
Asia Pacific U.S. APAC ex-China Euro Area China

2022. 2027

Data retrieved as of December 12, 2022. Asia Pacific Australia, China, Hong Kong, India, Japan, Korea, New Zealand Taiwan, India, and ASEAN (Brunei, Cambodia,
Indonesia, Laos, Malaysia, Myanmar, Philippines, Thailand, Vietnam). Source: IMF, World Bank, National Statistical Agencies, Haver, KKR GMAA analysis.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

EXHIBIT 6 | The Future Growth of the Middle Class Will Likely Occur in APAC

350m 130m
88% In China In the rest of the world

of the next billion

entrants into the
middle class
380m
In India
will be in Asia

210m
In the rest of Asia

Asia could represent

2/3 of the global middle class

population by 2023

Source: Brookings Institution as of 2020

Demographics also play into the consumption story. Most APAC is also home to 60% of the world’s young people
of the world’s societies outside sub-Saharan Africa are (between the ages of 15 and 29), and this group makes
aging, but some are further along than others. In Japan, up 25% of the region’s population, concentrated in the
one of the world’s oldest societies, some 30% of the developing economies.7 Countries like Indonesia and
population is already over 65. Investments in healthcare, Vietnam can still reap a demographic growth dividend,
automation, and services will be key to serving older despite the fact that they are aging faster than economies
populations and maintaining an adequate workforce. that are already relatively old. Investments in sectors such
as education are important in these younger countries.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

EXHIBIT 7 | Developing Countries are Still Young, but Aging Faster than Developed Economies

Population 65+ in 2020 Estimated Change in 65+ Population, 2020-2050

30%

169%

120% 120%
16% 16% 16%
13% 84%
63%
7%

5%

India China South U.S. Australia Japan Japan U.S. Australia South China India
Korea Korea

Source: UN World Population Prospects, KKR GMAA analysis as of May 2023

As we will discuss more fully in the next section, the

public markets in APAC are heavily weighted toward
asset-heavy sectors such as real estate, natural resources
and financials. But there is a wide variety of businesses
in the performing credit space that have both interesting
business models and an urgent need for capital. From
an investment perspective, gaining access to credits
that more closely mirror APAC's secular growth trends
is a challenge for investors given the makeup of today's
public markets.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

The Supply Side: Banks in APAC have selectively scaled back on lending
in recent years, particularly to smaller businesses,
The Credit Landscape as a result of evolving regulatory rules, anxiety

in Asia Pacific over concentration risks in challenged and cyclical

sectors, concerns about the impact of an inflationary
Businesses in APAC generally do not have the same environment, and generally a more conservative
access to diversified debt and hybrid capital alternatives stance coming out of the pandemic. The result is that
that are available in the U.S. and European credit markets. the region’s banks tend to overemphasize relationships
Banks account for 80% of the credit market, a significantly and traditional sectors. The banking system still works
higher proportion than in either Europe or the United well for very large companies, national champions, and
States (Exhibit 8). But traditional bank lending is seldom state-owned enterprises, but ascendant and middle-
able to serve all the needs of borrowers who may require market businesses tend to have less access. We see
flexibility or transitional financing. The financial sector private credit in APAC as a complement to the banking
is less developed than in the West, and banks in APAC system, expanding the range of capital available to the
generally have been more conservative lenders. region’s businesses.

Public debt markets are another place that businesses

could, in theory, get funding. The public bond markets
EXHIBIT 8 | Regional Bank Share have started to develop in the past couple of decades,
of Total Credit but syndicated institutional lending markets remain
relatively less developed in most of APAC compared to
Europe or the United States. The public debt markets
can be volatile and remain small relative to the region’s
21% GDP. This supply dynamic is further exacerbated by the
46% lack of depth in the region’s bond markets, which are
narrowly constructed from an industry and geographic
67%
perspective, and are typically only available to larger
companies. As a result, firms that cannot get bank loans
79% have relatively few options beyond issuing equity, which
can be expensive and dilutive.
54%
Our research also shows that the public debt markets,
33% specifically the high yield bond markets, do not offer
access to the full spectrum of opportunities available
Asia Pacific Europe United States
in private markets at equivalent rates of return. The
Bank Credit Non-Bank Credit benchmark BAML ICE Asia High Yield Index is heavily
weighted toward real estate, finance and utilities
Source: Bank for International Settlements, as of March 31, 2023. companies, which together make up nearly 58% of the
Calculated as bank credit divided by total credit to the private non-financial
sector. Europe includes Austria, Belgium, Cech Republic, Denmark,
index (Exhibit 9). In our view, this composition reflects an
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, older vision of the region, starkly opposed to the view
Netherlands, Norway, Poland, Portugal, Spain, Sweden, Switzerland,
we express through our thematic investing focus, which
Turkey and United Kingdom. Asia Pacific includes Australia, China, Hong
Kong, India, Indonesia, Japan, South Korea, Malaysia, New Zealand, leans more heavily toward consumer-driven companies,
Singapore and Thailand. technological innovation, and healthcare.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

EXHIBIT 9 | The Top 5 Components of APAC High Yield vs. KKR Asia Private Credit

KKR Asia Private Credit APAC High Yield

GICS Sector/Sub-Industry GICS Sector/Sub-Industry
Education Services 19% Real Estate Development 20%

Industrials 16% Financials 17%

Information Technology 14% Casinos & Gaming 14%

Health Care 14% Utilities 13%

Specialized Consumer Services 11% Materials 11%

Other 27% Other 25%

100% 100%

GICS Sector, except for Consumer Discretionary and Real Estate, where GICS Sub-Industry is used. Any GICS Sector or Sub-Industry below 10% is aggregated in
"Other" for ease of presentation. For KKR Asia Private Credit, Education Services and Specialized Consumer Services are part of the Consumer Discretionary GICS
Sector classification. For APAC High Yield, Casinos and Gaming are part of the Consumer Discretionary GICS Sector classification and Real Estate Development is
part of the Real Estate GICS Sector classification. "Other" includes 8% in certain other real estate sub-industries.

In the United States and Europe, private debt has

increasingly filled the capital gap for companies that
EXHIBIT 10 | The Growth of APAC Private
may be too small for public bond markets or syndicated
Credit over Time
loan deals, that need flexibility in terms or structure, or
that simply prefer the certainty of execution associated 100
with private lending. The APAC private credit market has
grown very quickly (Exhibit 10) but is still small compared 80

to other regions. Despite the region being responsible

60
for close to two-thirds of global growth, only 6% of
the global private credit assets under management 40
are in APAC, with only a subset of this focused on the
performing private credit market. 8 20

The private credit market in APAC began with distressed

0
debt, with private lenders offering businesses a means 2014 2015 2016 2017 2018 2019 2020 2021 2022
to recapitalize distressed high yield bonds during the
Asian Financial Crisis of the late 1990s.9 Since then, the Special Situations + Distressed Debt

number of private credit deals and the average size of Mezzanine Direct Lending Venture Debt

those deals have steadily increased. However, the region

Source: Preqin as of July 2023
still has a reputation as a market for special situations
lending. In fact, roughly half of the private credit capital
raised in APAC over the last decade has been for special
situations or distressed investments (Exhibit 11).

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

We strongly believe performing credit is likely to

play an increasingly important and outsized role in EXHIBIT 11 | Special Situations and Distressed
credit markets. Over time, we have seen a deepening Debt Dominated the Asia Pacific
awareness of performing credit toolkits and Private Credit Market
sophistication on the part of corporates and sponsors
in the region. In short, we believe we are in the early 100%
innings of an attractive, highly scalable opportunity.

80%
How Performing Private
Credit Can Address Asia’s
60%
Capital Gaps
As the APAC private credit market grows, we think flexible
capital and the ability to invest across the debt capital 40%

structure are key. We choose to lend only in performing

credit across three major strategies: direct lending, capital
solutions, and collateral-backed lending. 20%

Each of our three preferred types of lending offers

access to different markets and different places in the
0%
capital structure and allows us to pivot as opportunities
2014 2015 2016 2017 2018 2019 2020 2021 2022
ebb and flow.

Direct Lending Special Situations + Distressed Debt

Mezzanine Direct Lending Venture Debt
As noted earlier, many borrowers in APAC historically
have struggled for alternatives beyond traditional senior Source: Preqin as of July 2023
bank loans, unlike more scaled and developed markets
in the United States and Europe, where a broader
lender base of insurance capital, business development
companies, and CLO platforms delivered liquidity to the recapitalizations and bolt-on acquisitions. The growth of
syndicated loan markets. This has created a vacuum for the private equity market in the region and the shift from
direct lending solutions that alternative credit providers minority and growth investments to control leveraged
have started to fill. buyouts therefore underpins the growth of direct lending
(Exhibit 12).
We would typically define direct lending as stretch
senior or unitranche financings in excess of where Aside from private equity sponsor-led financings, there
traditional banks would typically lend. As previously is a growing demand for direct lending solutions from
discussed, the majority of direct lending in APAC tends underserved corporates that are unable to obtain
to be sponsor-driven. In our own business, about three- efficient credit capital from banks, even on a senior
quarters of direct lending loans are to back private equity secured basis. This constitutes roughly a quarter
sponsors across a range of situations, including buyouts, of our direct lending activity to date.

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In more developed markets, increased competition has Australia has strict capital requirements for banks,
gradually eroded some standard creditor protections, and we have seen a pullback in leveraged lending to
as evidenced by the advent of covenant-lite loans and private equity sponsors in recent years, which we think
extensive EBITDA adjustments. Because the demand will support demand for private credit going forward.
for private credit is so strong and the supply is so limited Sponsor lending has typically been a lower priority for
in APAC, we find that we can lend at relatively more local banks in Australia compared to mortgage financing,
conservative leverage levels and obtain more protective infrastructure finance, and lending to large corporates.
terms than in the U.S. or European direct lending We think these factors will support demand for private
markets, even when dealing with large international and credit going forward.
local sponsors. We’re also seeing the opportunities for
In India, while bank lending has been rising quickly,
larger direct lending deals as the market matures and
regulations prohibit local banks from financing the
leading companies expand.
acquisition of shares by foreign parties. We expect these
The biggest markets for direct lending are Australia restrictions, coupled with strong economic fundamentals
and India, which we estimate make up some 60% and and rapid growth in private equity, to bolster demand for
20% of the current market, respectively. We continue private credit. In fact, a recent survey suggests that 83% of
to see unitranche and other stretch senior lending credit fund managers in India are bullish on private credit
opportunities develop in other parts of APAC. investments over the next two years.10

EXHIBIT 12 | Private Debt-Financed Buyout Deals in APAC

$400

345
$350
333
315 308
299 280 $300

262
$250
220

194

($M)
$200
168
146 $150
138 138 136
106
$100

$50
22 24 17
5 7 5 5 7 9 9 10 14 13
4 7
$0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Asia Pacific Buyout Deals Asia Pacific Private Debt Deals Asia Pacific Average Buyout Deal Size

Source: Preqin buyout deals as of October 17, 2023. Asia Pacific includes Asia and Australasia.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

Capital Solutions
Some borrowers need different kinds of capital, including EXHIBIT 13 | When Are Capital Solutions
junior debt financing, mezzanine debt, or hybrid capital in Useful in APAC?
the form of preferred equity or convertible instruments,
to expand, refinance, or access liquidity. Historically, if
Effecting a partial return of capital to majority
these borrowers could not get bank capital or syndicated
shareholders without raising dilutive equity
funding, they typically had to turn to raising equity, diluting or ballooning leverage
existing shareholders. We see a compelling opportunity
to provide high-quality borrowers with hybrid financing
Bridging a valuation gap during periods of
that has credit-like protections, higher contracted rates
market volatility in M&A or IPO markets
of return, and upside participation potential in the form
of warrants or equity conversion rights. This demand
is significant and today we expect capital solutions to Transitional funding for companies with
capital-intensive business models or that are
represent approximately 40% of the market opportunity
ramping assets
in performing private credit.

Unlike the market for direct lending, which is Solving a near-term maturity to bridge
geographically more concentrated, capital solutions toward a longer-term capital structure
opportunities arise in many markets in APAC, driven or facilitate a refinancing
by idiosyncrasies in local markets or local situational
factors. Furthermore, the capital solutions opportunity
Managing liquidity constraints in the face
is much more concentrated on leading corporates than of higher rates or working capital cycles
direct lending is, with private equity sponsors accounting
for only about 20% of the opportunity set, according to
Offering preferred equity that (i) functions
our estimates.
as pre-IPO validation capital from a reputable
Some of the situations where we believe capital solutions institutional investor and (ii) right-sizes the
can be helpful for both corporates and sponsor-backed capital structure prior to an IPO
portfolio companies are detailed in Exhibit 13.
Filling a capital gap for a public company
Collateral-Backed Lending being taken private
We define collateral-backed opportunities as lending
against pools of physical or financial assets. Similar Providing more structured capital to help
to what is happening in Europe and the United States, corporates maintain or improve credit ratings
we see an attractive growth opportunity as banks
facing rising regulatory capital charges increasingly
pull back from asset-backed lending and divest non-core
loan portfolios.

The collateral in these types of transactions can vary

widely. Our team divides the opportunity into four areas:
consumer finance (e.g., pools of auto loans, mortgages,
and other consumer debt), hard assets (e.g., airplane
leasing), small and medium-sized business financing (e.g.,
accounts receivable, equipment leasing), and contractual

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

cash flows (e.g., trail commissions, intellectual property,

royalty streams, etc.). We estimate that APAC makes EXHIBIT 14 | Global Private ABF Market
up roughly one-fourth of the global market for private by Region
asset-backed finance (Exhibit 14).

At a portfolio level, collateral-backed opportunities offer

non-corporate exposure to hard assets or contractual
revenue streams, diversifying portfolios away from the
corporate loans of direct lending or capital solutions. 23%
Asia Pacific
Because collateral-backed opportunities group many
different loans together, they offer both inherent asset 57% 1%
Others
North
diversification and a potential cushion against capital loss. America

For collateral-backed finance to work, lenders need 19%

Europe
efficient senior financing. For that reason, this sort of
lending is more prevalent in APAC’s developed markets,
such as Australia. While collateral-backed transactions
currently account for the smallest portion of our activity,
we think the opportunities in this area are poised to
increase as regional capital markets grow and mature Source: Integer Advisors and KKR research estimates as of October 31, 2022.

and banks continue to retreat from select markets.

Understanding Relative Value usually a broader range of 300-500 bps compared

to subordinated lending deals in the United States or
Private credit in APAC may come with certain risks and Europe. The exact premium depends on situational
challenges that are not present in Western markets. dynamics, local borrowing rates, relative complexity and
For example, the developing legal systems in some other factors.
countries make it essential to know how to navigate
However, we think there is another, potentially more
local systems and stay abreast of potential regulatory
important, question to ask about relative returns: How
changes. Local relationships, sophisticated structuring
much risk are investors actually taking? Because of the
knowledge, and a deep understanding of insolvency
gap between supply and demand for capital in the region,
processes in each jurisdiction are critical for diligence,
we have seen that there are fewer lenders competing for
counterparty selection, and protecting capital. The
loan deals. That, in turn, gives lenders much more power
region’s diversity can also be an investment challenge,
to set favorable terms and exercise a degree of control
with investors who have an on-the-ground presence,
over operations to protect on the downside.
knowledge of local languages and cultures, deep local
relationships, and market experience at an advantage In direct lending, we are seeing tighter documentation
over those who do not. more akin to bank lending than the types of private
credit terms we might see in the United States or Europe.
How much reward is there for taking on these risks?
The vast majority of private equity sponsor-led direct
The premium for lending in APAC varies considerably
lending deals in APAC have debt maintenance covenants,
depending on the market and the type of loan. We
as opposed to the greater proportion of covenant-lite
typically see a 50-100 basis-point (bp) premium
deals in the West, in addition to more lender-favorable
over the United States and Europe for direct lending
definitions and tighter documentation standards.
deals. However, for capital solutions, the premium is

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Historic market trends are not reliable indicators of actual future market behavior or future performance which may differ materially, and are not to be relied upon as such. 15
 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

In capital solutions, as in direct lending, most deals have

covenants. We tend to focus on larger businesses and
Asia Pacific Private Credit
are typically able to detach at a point more consistent as a Diversifier
with senior debt in Western markets. Larger businesses
tend to be more resilient in difficult economic times, Private credit in APAC can offer two major forms of
with more options to obtain additional financing or diversification. First, it can be a meaningful diversifier
otherwise turn the ship. Private lenders also tend to have for portfolios comprised primarily of U.S. and European
more positive and negative controls when providing private credit. Moreover, based on our work, we believe
capital solutions, especially when there is a component there is evidence that adding APAC private credit to
of equity-style upside participation that comes with a a blended portfolio can result in better risk-adjusted
negotiated shareholders agreement. Protections may returns (For details on these calculations, please see
include the ability to approve capital expenditures, exit our Sidebar.)
rights, performance milestones, and the ability to take Asynchronous global economic growth dynamics can
certain actions if leverage increases. help drive this diversification potential. In the years
In short, we think investors should consider the holistic after the Global Financial Crisis, the world’s economies
risk-adjusted reward of investing in an APAC credit moved more or less in synch. Central banks around the
portfolio, taking into account not just an attractive return globe drastically and simultaneously reduced interest
premium, but also differentiated protections from rates and kept them very low for more than a decade.
structure, governance, controls and collateral. The pandemic and immediate post-pandemic years,
however, are a telling reminder that growth cycles and
economic trends can and do diverge. The United States
and Europe have tended to follow one set of trends of
late, while APAC economies have followed another. For
example, Western economies reopened more quickly
after the worst of the COVID-19 pandemic, while in many
ways, China’s recovery from lockdowns has yet to fully
materialize. On the other hand, post-pandemic inflation
and rising rates have had a more pronounced impact on
the United States and Europe than on APAC.

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 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

SIDEBAR

Incorporating APAC Private Credit into an Investor’s Portfolio of

Alternative Credit Can Enhance Risk-Adjusted Returns

To test how APAC private credit tends to affect APAC Private Credit Improves Risk-Adjusted
a portfolio, we constructed two portfolios of Returns in a Portfolio
stocks, bonds and private credit. Stocks + 30% Alt Credit
7 [Equal Weights
Across Regions]
In the first portfolio, we assumed a portfolio
6.9
of 30% private credit, split equally between 60/40 + 30% Alt Credit
6.9
U.S. private credit and Europe private credit, [Equal Weights

Modeled Portfolio Return

Across Regions]

and we plot modeled portfolio return relative 6.8 Stocks + 30% Alt Credit
[Equal Weights Across Regions]
to modeled portfolio volatility, assuming the 6.8

stock/bond portfolio shifts from 0 to 100%. 6.7

We then constructed a second portfolio where 6.7

Bonds + 30% Alt Credit
60/40 + 30% Alt Credit
[Equal Weights Across Regions]
we assumed a 30% allocation to private credit. 6.6 [Equal Weights
Across Regions]

But in this portfolio, we introduced APAC 6.6

private credit such that the 30% allocation was 6.5 Bonds + 30% Alt Credit
split across U.S. private credit, Europe private [Equal Weights Across Regions]

credit and APAC private credit. Similar to the 5 6 7 8 9 10 11 12 13 14

first portfolio, we plotted modeled portfolio Modeled Portfolio Volatility

return relative to modeled portfolio volatility, Stocks, Bonds, US Direct Lending, EU Direct Lending
assuming the stock/bond portfolio shifted Stocks, Bonds, US Direct Lending, EU Direct Lending,
from 0 to 100%. Asia Credit

Adding APAC private credit to the portfolio APAC Private Credit Exhibits Lower Correlations
shifted the efficient frontier upwards, which to US and Europe Private Credit
means that it achieved the same level of
U.S. Credit Europe Credit Asia Credit
expected return with lower risk. This is largely
U.S. Credit 1.00 0.95 0.84
due to the higher diversification that Asia
Europe Credit 0.95 1.00 0.80
private credit offers against the other private
Asia Credit 0.84 0.80 1.00
and public assets in the portfolio.

Equities refers to the S&P 500, Bonds refers to the Global-Aggregate; correlations and volatilities are estimated using public proxies for Alternative Credit defined as
follows: US Direct Lending: Morningstar LSTA US Leveraged Loan TR USD; EU Direct Lending: Morningstar European Leveraged Loan TR EUR; Asia Credit: 35% ICE BofA
Australia Corporate Index * 1.25x, 20% ICE BofA High Yield Emerging Markets Corporate Plus India Issuers Index, 22.5% ICE BofA BB Asian Dollar High Yield Index, 22.5%
ICE BofA B Asian Dollar High Yield Index. Data from March 31, 2004 to September 30, 2023. Assuming KKR expected returns for S&P 500 and Global-Aggregate, and
KKR targeted unlevered returns for Alternative Credit. Source: Bloomberg, KKR GBR Analysis.

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Note: Unless indicated, the above reflects the current market views, opinions and expectations of KKR based on its historic experience and other analysis.
Historic market trends are not reliable indicators of actual future market behavior or future performance which may differ materially, and are not to be relied upon as such. 17
 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

EXHIBIT 15 | Some APAC Countries Have Weak Correlations with One Another

Australia Singapore India China Japan Korea Hong Kong Indonesia Malaysia Vietnam

Australia 1.00 0.90 0.79 0.85 0.97 0.83 0.86 0.85 0.89 0.78

Singapore 0.90 1.00 0.59 0.86 0.93 0.95 0.94 0.78 0.88 0.61

India 0.79 0.59 1.00 0.65 0.76 0.52 0.60 0.84 0.74 0.95

China 0.85 0.86 0.65 1.00 0.86 0.83 0.88 0.78 0.83 0.67

Japan 0.97 0.93 0.76 0.86 1.00 0.89 0.86 0.84 0.89 0.78

Korea 0.83 0.95 0.52 0.83 0.89 1.00 0.90 0.69 0.82 0.58

Hong Kong 0.86 0.94 0.60 0.88 0.86 0.90 1.00 0.77 0.87 0.59

Indonesia 0.85 0.78 0.84 0.78 0.84 0.69 0.77 1.00 0.91 0.83

Malaysia 0.89 0.88 0.74 0.83 0.89 0.82 0.87 0.91 1.00 0.77

Vietnam 0.78 0.61 0.95 0.67 0.78 0.58 0.59 0.83 0.77 1.00

Quarterly JACI APAC indices data from Q4 2012 to Q3 2023. The JACI APAC benchmark index tracks US$ denominated debt issued by Corporate, Sovereign, and
Quasi-Sovereign entities from the entire Asia Pacific region spanning Investment Grade and High Yield debt segments. Source: JP Morgan, KKR GBR Analysis as
of September 30, 2023.

We tend to group Asia’s economies into two Hong Kong and Singapore, as well as the cities of
categories, developing and developed economies, Shenzhen and Shanghai, have become global financial
with plenty of caveats and exceptions. Australia, centers. Singapore, as an example, has encouraged
New Zealand, Japan, South Korea, Hong Kong, and the development of the private credit market in a bid to
Singapore, fit into the developed bracket; while the become a financial gateway to Asia and a global hub
developing economies include China, India, Indonesia, for private markets investments. Notably, the Monetary
Malaysia, the Philippines, and Vietnam. We think that Authority of Singapore has pledged $1 billion in
both these groups of developing and developed investment to private credit funds and offered support to
economies are currently attractive for private credit fund managers expanding in Asia.
investing due to a blend of factors such as stable
India, one of the region’s fastest-growing economies,
financial or regulatory environments, governments
enjoys strong macroeconomic tailwinds in the form
supportive of foreign direct lending, and attractive
of a growing middle class and the ongoing efforts by
macroeconomic trends.
international corporations to diversify supply chains. A
Japan and South Korea are among the world’s most significant ramp-up in private equity activity over the
technologically advanced economies, and the reform last four years has led to increasingly scaled leveraged
of large conglomerates is a powerful trend in both buyouts that require more flexible financing. In addition,
places that may facilitate robust growth in private structural reforms such as insolvency and bankruptcy
credit. For example, in South Korea, we are seeing code reforms and changes to labor and land laws have
signs that blue-chip Korean borrowers seeking made it easier to do business in the country and built
flexible and unconventional capital solutions that local confidence in the regulatory regime.
financiers consider too complex.

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Note: Unless indicated, the above reflects the current market views, opinions and expectations of KKR based on its historic experience and other analysis.
Historic market trends are not reliable indicators of actual future market behavior or future performance which may differ materially, and are not to be relied upon as such. 18
 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

Southeast Asia, on the other hand, is not a deep buyout/ financing structures over others.
control market. The majority of its sponsor activity is
However, investing in a region as vast and complex
in minority or growth deals. There has been limited
as APAC does require specialized expertise. On-the-
structural bank retrenchment due to a relatively benign
ground coverage is not only important for sourcing
regulatory environment for banks, but that doesn’t
deals, but also for investing. We have structured our
mean that demand for corporate credit is perfectly
own credit team so that it is spread across the region
fulfilled. Tailored capital solutions are often required for
and embedded within our country investment teams
underserved corporates, which are frequently family-
to enable us to access the full benefits of a deeply local
owned. Their needs often fall into two broad categories.
platform across origination, deal selection, ongoing
The first is helping to bridge a gap on valuation and
monitoring and portfolio management, and diligence.
manage dilution by using hybrid capital as a substitute
for minority equity. The second is providing transitional
capital for companies that are either undergoing
generational changes in ownership or that need
bridging capital before an asset or business has
matured and stabilized.

The relative strength of the legal systems in the various

APAC countries can be an important differentiator. On
one end of the spectrum, Australia has a very robust
bankruptcy code that is arguably even more lender-
friendly for secured creditors than most other developed
markets. On the other end of that spectrum are some
emerging economies where legal outcomes are much
less predictable and reliable. In such jurisdictions, we
think lenders should consider structuring deals to include
enforcement and downside protection, in addition to
relying on local relationships built with the borrower
and its network of capital providers. Examples of these
kinds of protections include collateral escrow accounts,
pre-wiring arbitration processes and/or taking security
in offshore jurisdictions with more robust creditor
protections, as well as other positive controls that give
lenders early intervention rights to ensure the borrower
is both willing and able to repay.

To take full advantage of the diverse array of APAC

private credit opportunities, we believe a pan-Asia
approach makes sense. Investing across sub-regions and
in different parts of the capital structure allows investors
to pursue the best opportunities while also making
it possible to pivot when global economic conditions
and regional cycles favor one or more sub-regions or

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Historic market trends are not reliable indicators of actual future market behavior or future performance which may differ materially, and are not to be relied upon as such. 19
 KKR PRIVATE CREDIT | Private Credit in Asia Pacific: A Region on the Rise

Conclusion Finally, there is a risk-adjusted return premium over

investments in the United States and Europe. However,
For investors, the private credit opportunity in APAC that premium must be viewed holistically. It’s true that
boils down to a few key points. specialized local knowledge is imperative, including local
First, we think that given the outsized role the region languages, a deep understanding of local regulatory
plays and is likely to continue to play in global growth and systems, and strong relationships on the ground. But
global consumption, portfolios that are under-allocated because the demand for performing credit capital so
to the region are missing a critical opportunity. In thinking far outstrips supply, with the imbalance set to grow
about how and where to invest in APAC, we believe considerably in the future, investors have opportunities
private markets offer access to opportunities that are to lend to large, market-leading companies with
not as readily available in APAC's public debt markets, covenanted structures, governance rights, and other
which are heavily weighted toward utilities, financials, protective elements that would not be as commonly
natural resources, and property – an outdated snapshot available in Western markets. Taken as a whole, we think
of the region that does not reflect the strong growth we this asset class offers a gateway to a variety of dynamic
foresee in consumption, healthcare, automation, and businesses in a region that increasingly powers the
other emerging economic sectors. world’s growth.

In addition, investments in APAC can diversify global

credit portfolios that are overly weighted to U.S. or
European private credit. A pan-Asia approach that
invests across the region allows investors to further
diversify and to pivot as strengths and weaknesses
emerge in any single economy or sector.

Endnotes
1. Source: Haver Analytics, KKR Global Macro & Asset Allocation analysis as of April 14, 2023.
2. Source: Preqin buyout deals as of October 17, 2023.
3. Source: Preqin buyout deals as of October 17, 2023.
4. Seong, Jeong, et al. “Asia on the Cusp of a New Era.” McKinsey Global Institute. September 22, 2023. https://www.mckinsey.com/mgi/our-research/asia-on-the-cusp-
of-a-new-era#/
5. Defined as people who spend at least $12 a day. Fengler, Wolfgang; Kharas, Homi and Juan Caballero. “Asia’s Tipping Point in the Consumer Class.” Brookings Institu-
tions Commentary. June 2, 2022. https://www.brookings.edu/articles/asias-tipping-point-in-the-consumer-class/
6. “World Data Lab Sheds Light On ‘The Asia Of Tomorrow’ At The Asia Inclusive Growth Forum.” World Data Lab. August 25, 2023. https://worlddata.io/world-data-lab-
sheds-light-on-the-asia-of-tomorrow-at-the-asia-inclusive-growth-forum/
7. Chris Morris. “In Asia, Young People are Key to Achieving National Development Goals,” Asia Development Bank Blog. July 24, 2019. https://blogs.adb.org/blog/asia-
young-people-are-key-achieving-national-development-goals
8. Preqin as of September 30, 2022
9. Mercer. “Private Debt in Asia Pacific.” June 2021.
10. “Private Credit in India: H1 2023 Update.” EY. August 24, 2023.

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Historic market trends are not reliable indicators of actual future market behavior or future performance which may differ materially, and are not to be relied upon as such. 20
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