According to Preqin’s Private Debt Online database, as of October 2015, the estimated level of dry powder within Asia for all private debt strategies stood at $7.7bn. Since 2007, there has been a slight increase in Asia-focused dry powder, which can be explained by an increase in fundraising activity within the space. However, since 2011, dry powder levels have begun to even out, indicating a greater level of deal activity to match fundraising. Although special situations vehicles have contributed the largest proportion of Asia-focused dry powder in recent years, uncertainty within global markets has seen distressed debt begin to capture a larger share of available capital focused on the region.
Dry powder has increased by 57% for Asia-focused funds in the past five years, from $4.9bn in 2010 to $7.7bn today. However, since 2011 dry powder levels have remained relatively stable, within the $7.6bn to $9bn range. As both LPs and GPs continue to increase their exposure in this space, the number of emerging markets-focused funds should continue to rise. 2015 has seen 10 Asia-focused private debt funds close so far, while 2014 and 2013 saw eight and nine funds close respectively. This fundraising momentum is driven by the increase in investor appetite within emerging markets and for private debt specifically, as institutional investors are slowly taking to illiquid credit vehicles.
Dry Powder Composition by Strategy
Overall, dry powder levels have been stable in Asia since 2011; however, the breakdown by strategy since that time period has altered. Special situations has retained the most dry powder of all fund types in 2015 YTD, currently representing 35% of private debt dry powder in Asia. Distressed debt has seen an increase of $800mn since 2014, and currently represents 29% of Asia-focused dry powder. Mezzanine dry powder, which represents 27% of Asia-focused private debt dry powder, has also increased by $400mn since 2014, while direct lending, with $700mn, represents just 9% in 2015 YTD.
Relatively stable levels of dry powder versus an increase in fundraising for Asia-focused private debt funds demonstrates that deal activity has continued to grow and keep pace with fundraising. With more capital being brought to the region, it will be interesting to see if favourable and risk-worthy investment opportunities continue to be capitalized by credit managers.