DBS's Clifford Lee on Asia's private credit opportunity

Singapore-based Lee, who has been recently promoted to the bank's global head of investment banking, told FA how private credit is becoming an attractive option for Asia's SMEs.

April 17, 2024

FinanceAsia recently caught up with Singapore-based Clifford Lee, who has been recently promoted to global head of investment banking, DBS.

Last month, Lee stepped up from his previous role as managing director, global head of fixed income. His new role encompasses debt and equity capital markets for the Singapore bank which has a deep Asia presence.

Lee (pictured) discussed the recent rise in the private credit markets in Asia and how the bank’s investment in a fund of private credit player Muzinich & Co. is performing.

The use of private credit is far more established in western markets, but for a very good reason.

Lee explained: “The private credit market is evolving and the drivers are different across the US, Europe and Asia. For instance, private credit provides access to lending not available in the public or bank markets, for different reasons. Some banks are more loaned up and face more capital constrains than others when lending to businesses. Mature Western economies also have more developed capital markets to meet financing needs.” 

In the US, around 30% of the market’s borrowing needs are met by banks, while this is around 40% in Europe and more like 80% in Asia.

Lee noted that there is a developing private credit market in the region, especially for SMEs.

He said: “In Asia, banks tend to focus on top-tier investment-grade names. For SMEs, banks are offering supply chain and trade financing for those with clear cash flow and liquid collateral. However, a group of companies that might be asset rich but cashflow restrained, or require pre-IPO or single stock-based financing - things that banks traditionally find it harder to lend to, that is where private credit comes in.”

Muzinich & Co. 

In June 2021, DBS became a $200 million anchor investor in a fund raised by New York-hedquartered private credit specialist Muzinich & Co., to help provide funding for SMEs in Asia Pacific (Apac) that may not be big enough to tap the public markets. The fund closed in July 2023 at $500 million. 

The Muzinich Apac Private Debt Fund I focuses on underserved lower-mid market companies typically with EBITDA between $5 to $50 million. It had an Asia Pacific strategy with key markets being Australia, Singapore, Hong Kong and Southeast Asia (SEA).

Muzinich, which in Apac has offices in Hong Kong, Singapore, Sydney and Tokyo, is independent and works at arm’s length from DBS, with the bank abstaining from investment decisions regarding deals it orginated.

The "sweet ticket loan size" is around $20 to $30 million, according to Lee, who added that “Muzinich has $500 million to deploy on an unlevered basis and around half of it has already been deployed. The yields are on average mid-to-low teens.”

The idea is that those SMEs who may not be able to tap traditional funding channels can instead look to private credit as an alternative for equity – for example if they are bridging into a trade sale or for an IPO. The capital helps businesses plan and strategise with more flexibility.

“Many SMEs are very familiar with private credit, in part as investors themselves. The awareness and market knowledge are growing," noted Lee. 

Lee explained his exact involvement: “I have a seat on the Muzinich investment committee and as a result, Muzinich become the first port of call when our clients have financing needs that may not be met by traditional public or bank markets. A good chunk of what Muzinich is seeing now comes from the bank (DBS). Private credit investors have expertise, but not the boots on the ground to do the sourcing of deals. Banks have boots on the ground, but they may not have the flexible lending capabilities that these businesses need.”

However, there are no short cuts in the space. Lee said: “For private credit funds, for every hundred deals they look at they do three, so it is extremely laborious. We have been training our bankers to understand opportunities and borrowing needs that can be met by the private credit space, so that they can help shortlist leads.”

He added: “In the Asia SME sector – the potential is huge but your ability to go through the leads is extremely important to make sure you have a sustainable business model. High credit risk means a higher potential for stress. Investors are going into a lending situation aware of the risks, but they can structure around that.”

Banks in Asia also sometimes work together to get private deals across the line. 

“It’s not uncommon to see a few banks working together to try and get some deals done. Different banks can bring different things to the table. You get annual returns, but the capital is locked up for a fixed period. Many private credit funds have a fund life of six to seven years – so they frame their transactions within those timeframes. You need time to deploy the funds, and time to bring the money back. So the average tenors of the loans would be around three years," Lee said. 

One potential private market, which has seen some recent traction in Hong Kong, is distressed lending -- where firms lend to the promoters against their personal assets, such as properties or shares.

Asia growth

Although exact figures are hard to obtain, the potential opportunity for private credit in Asia is set to continue to grow, especially as markets grow in sophistication and understand where private credit operators are looking to help.

Lee said: “Public markets remain choppy. Private credit is an interim alternative and there are more sponsors coming into the space. But we are still at the early stages as the allocation to Asia globally is in a low single percentage and there are a host of regulatory frameworks and court procedures that need to be further developed, such as foreclosure history. In the US and developed Europe, the rule of law is clearer.”

“We are just scratching the surface in Asia and as the rule of the law becomes more established, the market will grow. Hong Kong, Singapore, Japan, South Korea and Australia are the clearest markets [for the rule of law] in Asia which will see private credit grow. There are markets such as Indonesia, China, Thailand and the Philippines which are huge markets, and more growth can be expected once there’s more clarity,” Lee continued.

Another growth source could be to replace some of the role of private equity. 

Lee commented: “There is huge potential in Asia for private credit. People are starting to realise that there is not just equity and debt. There are structures in between for bespoke funding. For example, they can see debt as a replacement for equity. Private credit can be more attractive than private equity.”

“Private credit has been going strong globally, particularly over the last five to six years. In Asia, special situations lending is not new. It’s been happening in Asia since the mid-2000s, leading up to  the financial crisis in 2008. DBS has been involved in privately placed pre-IPO convertibles and leveraged financing since 2004/5," Lee added. 

After a turbulent last couple of years, including a global pandemic, many investors in Asia are hoping for a few years of stability in the region so companies can plan ahead with more certainty. 

“Economic growth is the best fuel for the private credit markets. We are hoping for China to stabilise in the medium term and for some normal years of growth across Asia’s markets,” Lee added. 

With China registering above expected 5.3% GDP growth for the first quarter of 2024, there is hope this could happen sooner rather than later. 

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